Big 5 Sporting Goods July 1 Quarter; Are They Addressing the Retailer’s Challenge?

Regular readers know I’ve had a pretty strong and, I hope, consistent opinion about how retail is evolving and what retailers/brands in our industry need to do.  Most recently, I wrote about it here.  It’s occurred to me that I should look at some new industry related companies to see how they are doing and if my thesis is holding up.  Big 5 is my first try.

Big 5 describes itself as “…a leading sporting goods retailer in the western United States, operating 435 stores and an ecommerce platform as of July 1, 2018. The Company provides a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. The Company’s 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.”

I imagine many of you have been in a Big 5 store.  Here’s a link to their web site.  From my perspective, there’s not enough distinctiveness in their stores or web site.  But with the demise of The Sports Authority, they’ve got less brick and mortar competition.

When I say there’s a lack of distinctiveness, I mean the focus is completely on selling stuff.  Now, we all need to sell stuff.  But if your total focus is on selling things that lots of other places sell, then you are competing mostly on price.  In our industry, successful brands and retailers have to/are creating a customer connection through new brands and products, experiences, some amount of exclusivity, good data mining and communications, and applying new found knowledge of who their customers are and why they buy; all the stuff we tend to group under “omnichannel.”  When you start to see brick and mortar and eCommerce supporting each other and being thought of as one revenue stream, you’re moving in the right direction.

Let’s look at Big 5’s 10-Q and conference call transcript and see if we can get some insight into how they are addressing these issues.

Sales for the quarter ended July 1 were down 1.57% or $3.7 million from $243.7 to $240 million in the same quarter last year.  Same store sales declined by 2.1%.  Most of the decline was in hard goods sales which, at $129 million, represented 53.8% of revenue for the quarter.

“Revenue associated with e-commerce sales is not material,” they tell us in the 10-Q.

The gross profit margin fell from 32.5% to 31.4%.  I’m wondering how doing more than half of your business in hard goods impacts gross profit margin.  Selling and administrative expenses were $74.7 million, or 31.1% of sales.  In last year’s quarter, they were $74.2 million or 30.4% of sales.

Interest expense rose from $380,000 to $793,000.  “Interest expense reflects an increase in average debt levels of $42.9 million to $83.0 million in the second quarter of fiscal 2018 from $40.1 million in the second quarter of fiscal 2017, as well as an increase in average interest rates of approximately 80 basis points to 3.3%…”

This is not the only company where interest expense will go up due to higher interest rates.

On the balance sheet, the current ratio improved from 1.99 to 2.20, but total debt to equity deteriorated, rising from 1.25 to 1.63 due to the increase in long term debt.  Stockholders’ equity fell from $207.0 to $180.1 million.  Inventory rose 5.1% to $345.6 million while sales declined.

CFO Barry Emerson made this comment on the inventory increase during the conference call.  “On a per store basis, merchandise inventory was up 3.3% versus the prior year. The increase primarily reflected the carryover of winter related products following the unfavorable warm and dry winter selling season…As we have done successfully in prior years with unfavorable winter weather, we plan to reintroduce this winter product carryover next season and we see little markdown risk associated with it.”

Cashed used in operations was $21.8 million in the six months ended July 1.  For the same period the prior year, it was $19.4 million.  “The decreased cash flow from operating activities for the first half of fiscal 2018 compared to the same period last year primarily reflects the decrease in net income, partially offset by smaller reductions in accrued expense largely related to income taxes.”

So that’s the rundown on the quarterly results.  Hardly going in the direction they want.  What might be the solution?

It’s not opening new stores.  They ended the quarter with 435 stores.  That’s up from 433 a year ago.  “Our current plans for 2018 full year have us opening approximately five stores and closing approximately three stores,” says President and CEO Steve Miller in the conference call.  It’s the correct time to be cautious about opening new stores and most are taking that approach.

But it doesn’t sound like improvement will come from ecommerce either.  Here’s Barry Emerson’s take on their efforts in ecommerce.  “We’re pleased with the growth of e-commerce.  Again our goal is to grow our – e-commerce business profitably. We still think that the key for us is the convenience of our brick-and-mortar stores. We continue to invest in the e-commerce business. We’re adding and more products and more functionality at the website.”

“And again as I mentioned it’s growing, it’s growing well but of a relatively small base. So we don’t – our e-commerce business wasn’t material to our overall operating results for 2017 and we don’t see it being material to our results for 2018. We hope that we’ll be able to again just continue to provide a reasonable sales count to our customers.”

To me, it’s a rather remarkable statement to say that the key for Big 5 is the convenience of their brick and mortar. More convenient than online if you’re selling the same product everybody else is selling with no customer centric strategies?

What does, “…just continue to provide a reasonable sales count to our customers” mean exactly with regards to ecommerce?

It’s like he was struggling a bit to know what to say about ecommerce.  And there’s no discussion of the kind of actions I mentioned above that leading brands and retailers are taking to compete in a customer centric, always connected environment.

It was only in 2018 that Big 5 started consolidating their ecommerce and brick and more revenue streams.  I come away with the sense that they are behind the curve in melding their stores and ecommerce business to serve their customers.  Perhaps being a big box retailer somehow makes it different, but I don’t think so.