See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
Description of Business
|
Big 5 Sporting Goods Corporation (the “Company”) is a leading sporting goods retailer in the western United States, operating 430 stores and an e-commerce platform as of April 4, 2021. 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, home recreation, tennis, golf and winter and summer recreation. The Company is a holding company that operates as one reportable segment through Big 5 Corp., its 100%-owned subsidiary, and Big 5 Services Corp., which is a 100%-owned subsidiary of Big 5 Corp. Big 5 Services Corp. provides a centralized operation for the issuance and administration of gift cards and returned merchandise credits (collectively, “stored-value cards”).
The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its 100%-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended January 3, 2021 included in the Company’s Annual Report on Form 10-K. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented.
The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.
(2)
|
Summary of Significant Accounting Policies
|
Consolidation
The accompanying Interim Financial Statements include the accounts of Big 5 Sporting Goods Corporation, Big 5 Corp. and Big 5 Services Corp. Intercompany balances and transactions have been eliminated in consolidation.
Reporting Period
The Company follows the concept of a 52-53 week fiscal year, which ends on the Sunday nearest December 31. Fiscal year 2021 is comprised of 52 weeks and ends on January 2, 2022. Fiscal year 2020 was comprised of 53 weeks and ended on January 3, 2021. The four quarters of fiscal 2021 are each comprised of 13 weeks. The first three quarters in fiscal 2020 were each comprised of 13 weeks, and the fourth quarter of fiscal 2020 was comprised of 14 weeks.
Recently Issued Accounting Updates
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this standard are elective and are effective upon issuance for all entities. The Company is evaluating the expedients and exceptions provided by the amendments in this standard to determine their impact.
Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.
- 7 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
COVID-19 Impact on Concentration of Risk
The novel coronavirus (“COVID-19”) pandemic has significantly impacted health and economic conditions throughout the United States and globally, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine.
The Company primarily operates traditional sporting goods retail stores located in the western United States, with approximately 52% of its stores, along with its corporate offices and distribution center, located in California. Because of this, the Company is subject to regional risks, including the impact of the COVID-19 outbreak. Beginning on March 20, 2020, the Company temporarily closed more than one-half of its retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. The Company was subsequently able to gradually reopen its store locations based on initially qualifying as an “essential” business under applicable regulations and later as a result of the easing of regulatory restrictions on retail operations in the Company’s market areas. In an effort to promote social distancing protocols, the Company implemented reduced store hours, limited the number of customers in its stores at any one time and generally implemented social-distancing guidelines throughout the store operating space in fiscal 2020. Due to the reduced customer traffic, and in an effort to preserve capital, the Company implemented temporary and permanent workforce reductions throughout the organization, temporarily reduced merchandise inventory orders and reduced advertising and capital spending in fiscal 2020. As of the end of fiscal 2020 and during the first quarter of fiscal 2021, all of the Company’s stores were open for in-store shopping, subject to continued appropriate social distancing restrictions and with reduced operating hours. The Company may further restrict its store operations and operations in its distribution facility if deemed necessary or if recommended or mandated by authorities, and new temporary closures of stores may be required if additional orders are issued in response to changing health conditions.
General Concentration of Risk
The Company purchases merchandise from over 680 suppliers, and the Company’s 20 largest suppliers accounted for 36.4% of total purchases in fiscal 2020. One vendor, Nike, represented greater than 5% of total purchases, at 8.5%, in fiscal 2020 and accounted for 7.2% of the Company’s total sales in fiscal 2020. In the first quarter of fiscal 2021, the Company was informed of an expansion of Nike’s direct-to-consumer initiatives that will impact certain multi-branded retailers, including the Company, and which will lead to a significant reduction in the Company’s future supply chain relative to this vendor. This transition is not expected to impact the Company’s ability to continue to purchase certain Nike branded products from authorized licensees. The Company is actively expanding its relationships with other new and existing vendors in order to replace the affected Nike product within its product mix.
Use of Estimates
Management makes a number of estimates and assumptions relating to the reporting of assets, liabilities and stockholders’ equity and the disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and reported amounts of revenue and expense during the reporting period to prepare these Interim Financial Statements in conformity with GAAP. Certain items subject to such estimates and assumptions include the carrying amount of merchandise inventories, property and equipment, lease assets and lease liabilities; valuation allowances for receivables, sales returns and deferred income tax assets; estimates related to stored-value cards and the valuation of share-based compensation awards; and obligations related to litigation, self-insurance liabilities and employee benefits. Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after April 4, 2021, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by management’s assumptions and estimates.
- 8 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Revenue Recognition
The Company operates solely as a sporting goods retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products in the western United States and online. Generally, all revenue is recognized when control of the promised goods is transferred to customers, for an amount that reflects the consideration in exchange for those goods. Accordingly, the Company implicitly enters into a contract with customers to deliver merchandise inventory at the point of sale. Collectability is reasonably assured since the Company only extends immaterial credit purchases to certain municipalities and local school districts.
In accordance with ASC 606, Revenue from Contracts with Customers, the Company disaggregates net sales into the following major merchandise categories to depict the nature and amount of revenue and related cash flows:
|
|
13 Weeks Ended
|
|
|
|
April 4,
2021
|
|
|
March 29,
2020
|
|
|
|
(In thousands)
|
|
Hardgoods
|
|
$
|
140,906
|
|
|
$
|
108,774
|
|
Athletic and sport footwear
|
|
|
66,673
|
|
|
|
57,498
|
|
Athletic and sport apparel
|
|
|
63,526
|
|
|
|
49,128
|
|
Other sales
|
|
|
1,701
|
|
|
|
2,336
|
|
Net sales
|
|
$
|
272,806
|
|
|
$
|
217,736
|
|
Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:
For performance obligations related to retail store and e-commerce sales contracts, the Company typically transfers control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the product is tendered for delivery to the common carrier. For performance obligations related to stored-value cards, the Company typically transfers control upon redemption of the stored-value card through consummation of a future sales transaction. The Company accounts for shipping and handling relative to e-commerce sales as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only one performance obligation, the sale of the product, at shipping point (when the customer gains control). Revenue associated with e-commerce sales was not material for the 13 weeks ended April 4, 2021 and March 29, 2020.
The Company recognized $1.7 million and $1.9 million in stored-value card redemption revenue for the 13 weeks ended April 4, 2021 and March 29, 2020, respectively. The Company also recognized $0.1 million in stored-value card breakage revenue for the 13 weeks ended April 4, 2021 and March 29, 2020. The Company had outstanding stored-value card liabilities of $7.0 million and $7.5 million as of April 4, 2021 and January 3, 2021, respectively, which are included in accrued expenses in the accompanying interim unaudited condensed consolidated balance sheets. Based upon historical experience, stored-value cards are predominantly redeemed in the first two years following their issuance date.
In the accompanying interim unaudited condensed consolidated balance sheets, the Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $0.9 million and $1.2 million related to estimated sales returns as of April 4, 2021 and January 3, 2021, respectively, and recorded, in accrued expenses, an allowance for sales returns reserve of $1.8 million and $2.4 million as of April 4, 2021 and January 3, 2021, respectively.
Share-Based Compensation
The Company accounts for its share-based compensation in accordance with ASC 718, Compensation—Stock Compensation. The Company recognizes compensation expense on a straight-line basis over the requisite service period using the fair-value method for share option awards, nonvested share awards and nonvested share unit awards granted with service-only conditions. See Note 10 to the Interim Financial Statements for a further discussion on share-based compensation.
- 9 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Valuation of Merchandise Inventories, Net
The Company’s merchandise inventories are made up of finished goods and are valued at the lower of cost or net realizable value using the weighted-average cost method that approximates the first-in, first-out (“FIFO”) method. Average cost includes the direct purchase price of merchandise inventory, net of vendor allowances and cash discounts, in-bound freight-related expense and allocated overhead expense associated with the Company’s distribution center.
Management regularly reviews inventories and records valuation reserves for damaged and defective merchandise, merchandise items with slow-moving or obsolescence exposure and merchandise that has a carrying value that exceeds net realizable value. Because of its merchandise mix, the Company has not historically experienced significant occurrences of obsolescence.
Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends. The Company performs physical inventories of its stores at least once per year and cycle counts inventories at its distribution center throughout the year. The reserve for inventory shrinkage primarily represents an estimate for inventory shrinkage for each store since the last physical inventory date through the reporting date.
These reserves are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from expectations.
Valuation of Long-Lived Assets
In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows (“asset group”), usually at the store level. The carrying amount of a store asset group includes stores’ property and equipment, primarily leasehold improvements, and operating lease right-of-use (“ROU”) assets. The carrying amount of a store asset group is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the store asset group. Factors that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating and cash flow losses, and a projection that demonstrates continuing losses or insufficient income over the remaining reasonably certain lease term associated with the use of a store asset group. Other factors may include an adverse change in the business climate or an adverse action or assessment by a regulator in the market of a store asset group. When stores are identified as having an indicator of impairment, the Company forecasts undiscounted cash flows over the store asset group’s remaining reasonably certain lease term and compares the undiscounted cash flows to the carrying amount of the store asset group. If the store asset group is determined not to be recoverable, then an impairment charge will be recognized in the amount by which the carrying amount of the store asset group exceeds its fair value, determined using discounted cash flow valuation techniques, as contemplated in ASC 820, Fair Value Measurements.
The Company determines the cash flows expected to result from the store asset group by projecting future revenue, gross margin and operating expense for each store asset group under evaluation for impairment. The estimates of future cash flows involve management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning, and include assumptions about sales growth rates, gross margins and operating expense in relation to the current economic environment and the Company’s future expectations, competitive factors in its various markets, inflation, sales trends and other relevant environmental factors that may impact the store under evaluation. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions. If economic conditions deteriorate in the markets in which the Company conducts business, or if other negative market conditions develop, the Company may experience additional impairment charges in the future for underperforming stores.
The resulting impairment charge, if any, is allocated to the property and equipment, primarily leasehold improvements, and operating lease ROU assets on a pro rata basis using the relative carrying amounts of those assets. The allocated impairment charge to a long-lived asset is limited to the extent that the impairment charge does not reduce the carrying amount of the long-lived asset below its individual fair value. The estimation of the fair value of an ROU asset involves the evaluation of current market value rental amounts for leases associated with ROU assets. The estimates of current market value rental amounts are primarily based on recent observable market rental data of other comparable retail store locations. The fair value of an ROU asset is measured using a discounted cash flow valuation technique by discounting the estimated current and future market rental values using a property-specific discount rate.
The Company did not recognize any impairment charges in the first quarter of fiscal 2021 or 2020.
- 10 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Leases
In accordance with ASC 842, Leases, the Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware, and distribution center delivery tractors and equipment. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the interim unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment and finance lease liabilities on the interim unaudited condensed consolidated balance sheets. Lease liabilities are calculated using the effective interest method, regardless of classification, while the amortization of ROU assets varies depending upon classification. Finance lease classification results in a front-loaded expense recognition pattern over the lease term which amortizes the ROU asset by recognizing interest expense and amortization expense as separate components of lease expense and calculates the amortization expense component on a straight-line basis. Conversely, operating lease classification results in a straight-line expense recognition pattern over the lease term and recognizes lease expense as a single expense component, which results in amortization of the ROU asset that equals the difference between lease expense and interest expense. Lease expense for finance and operating leases are included in cost of sales or selling and administrative expense, based on the use of the leased asset, on the interim unaudited condensed consolidated statements of operations. Variable payments such as property taxes, insurance and common area maintenance related to triple net leases, as well as certain equipment sales taxes, licenses, fees and repairs, are expensed as incurred, and leases with an initial term of 12 months or less are excluded from minimum lease payments and are not recorded on the balance sheet. The Company recognizes variable lease expense for these short-term leases on a straight-line basis over the remaining lease term.
ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate (“IBR”) to determine the present value of lease payments. The collateralized IBR is based on a synthetic credit rating that is externally prepared on an annual basis. This analysis considers qualitative and quantitative factors based on guidance provided by a rating agency for the consumer durables industry. The Company adjusts the selected IBR quarterly with a company-specific unsecured yield curve that approximates the Company’s market risk profile. The collateralized IBR is also based upon the estimated impact that the collateral has on the IBR. To account for the collateralized nature of the IBR, the Company utilized a notching method based on notching guidance provided by a rating agency whereby the Company’s base credit rating is notched upward as the yield curve on a secured loan is expected to be lower versus an unsecured loan.
The operating lease ROU asset also includes any prepaid lease payments made and is reduced by lease incentives such as tenant improvement allowances. The operating lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.
Certain of the leases for the Company’s retail store facilities provide for payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease. Under ASC 842, these contingent rents are expensed as they accrue.
In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in ASC 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic, in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
- 11 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In accordance with this interpretive guidance, the Company elected to account for lease concessions related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. The Company accounted for its remaining lease deferrals related to COVID-19 as if no changes to the lease contract were made while continuing to recognize expense during the deferral period and deferring the payment obligation as a liability. The Company recorded remaining lease deferrals related to COVID-19 of $0.4 million and $0.6 million as of April 4, 2021 and January 3, 2021, respectively, in accrued expenses in the accompanying interim unaudited condensed consolidated balance sheets.
See Note 5 to the Interim Financial Statements for a further discussion on leases.
(3)
|
Fair Value Measurements
|
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate the fair values of these instruments due to their short-term nature. The carrying amount for borrowings, if any, under the Company’s credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. When the Company recognizes impairment on certain of its underperforming stores, the carrying values of these stores are reduced to their estimated fair values.
As of April 4, 2021 and January 3, 2021, the Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were assets subject to long-lived asset impairment related to certain underperforming stores. The Company estimated the fair values of these long-lived assets based on the Company’s own judgments about the assumptions that market participants would use in pricing the asset and on observable real estate market data of underperforming stores’ specific comparable markets, when available. The Company classified these fair value measurements as Level 3 inputs, which are unobservable inputs for which market data are not available and that are developed using the best information available about pricing assumptions used by market participants in accordance with ASC 820.
The major components of accrued expenses are as follows:
|
|
April 4,
2021
|
|
|
January 3,
2021
|
|
|
|
(In thousands)
|
|
Payroll and related expense
|
|
$
|
32,202
|
|
|
$
|
37,826
|
|
Occupancy expense
|
|
|
10,403
|
|
|
|
10,215
|
|
Sales tax
|
|
|
9,938
|
|
|
|
11,609
|
|
Other
|
|
|
25,808
|
|
|
|
23,227
|
|
Accrued expenses
|
|
$
|
78,351
|
|
|
$
|
82,877
|
|
Payroll and related expense as of April 4, 2021 and January 3, 2021 reflected a deferral of the employer portion of Social Security tax provided by the U.S. Coronavirus Aid, Relief and Economic Security Act, which allowed employers to defer their portion of the social security payroll tax otherwise due with respect to wages earned from March 27, 2020 through December 31, 2020.
- 12 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware and distribution center delivery tractors and equipment, and accounts for these leases in accordance with ASC 842.
Certain of the leases for the Company’s retail store facilities provide for variable payments for property taxes, insurance, common area maintenance payments related to triple net leases, rental payments based on future sales volumes at the leased location, as well as certain equipment sales taxes, licenses, fees and repairs, which are not measurable at the inception of the lease, or rental payments that are adjusted periodically for inflation. The Company recognizes variable lease expense for these leases in the period incurred which, for contingent rent, begins in the period in which it becomes probable that the specified target that triggers the variable lease payments will be achieved. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In accordance with ASC 842, the components of lease expense were as follows:
|
|
13 Weeks Ended
|
|
|
|
April 4,
2021
|
|
|
March 29,
2020
|
|
|
|
(In thousands)
|
|
Lease expense:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
649
|
|
|
$
|
722
|
|
Interest on lease liabilities
|
|
|
59
|
|
|
|
89
|
|
Finance lease expense
|
|
|
708
|
|
|
|
811
|
|
Operating lease expense
|
|
|
20,336
|
|
|
|
20,287
|
|
Variable lease expense
|
|
|
4,492
|
|
|
|
4,124
|
|
Sublease income
|
|
|
(78
|
)
|
|
|
(293
|
)
|
Total lease expense
|
|
$
|
25,458
|
|
|
$
|
24,929
|
|
In accordance with ASC 842, other information related to leases was as follows:
|
|
13 Weeks Ended
|
|
|
|
April 4,
2021
|
|
|
March 29,
2020
|
|
|
|
(In thousands)
|
|
Operating cash flows from operating leases
|
|
$
|
22,145
|
|
|
$
|
20,742
|
|
Operating cash flows from finance leases
|
|
|
60
|
|
|
|
112
|
|
Financing cash flows from finance leases
|
|
|
931
|
|
|
|
951
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
23,136
|
|
|
$
|
21,805
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
3,334
|
|
|
$
|
—
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
9,446
|
|
|
$
|
23,282
|
|
Weighted-average remaining lease term—finance leases
|
|
3.5 years
|
|
|
3.0 years
|
|
Weighted-average remaining lease term—operating leases
|
|
4.9 years
|
|
|
5.2 years
|
|
Weighted-average discount rate—finance leases
|
|
|
3.7
|
%
|
|
|
4.7
|
%
|
Weighted-average discount rate—operating leases
|
|
|
5.9
|
%
|
|
|
6.1
|
%
|
- 13 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In accordance with ASC 842, maturities of finance and operating lease liabilities as of April 4, 2021 were as follows:
Year Ending:
|
|
Finance
Leases
|
|
|
Operating
Leases
|
|
|
|
(In thousands)
|
|
2021 (remaining nine months)
|
|
$
|
1,898
|
|
|
$
|
64,078
|
|
2022
|
|
|
2,451
|
|
|
|
75,954
|
|
2023
|
|
|
1,599
|
|
|
|
59,910
|
|
2024
|
|
|
711
|
|
|
|
51,230
|
|
2025
|
|
|
341
|
|
|
|
34,803
|
|
Thereafter
|
|
|
388
|
|
|
|
41,831
|
|
Undiscounted cash flows
|
|
$
|
7,388
|
|
|
$
|
327,806
|
|
Reconciliation of lease liabilities:
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
3.5 years
|
|
|
4.9 years
|
|
Weighted-average discount rate
|
|
|
3.7
|
%
|
|
|
5.9
|
%
|
Present values
|
|
$
|
6,996
|
|
|
$
|
284,087
|
|
Lease liabilities - current
|
|
|
2,664
|
|
|
|
73,196
|
|
Lease liabilities - long-term
|
|
|
4,332
|
|
|
|
210,891
|
|
Lease liabilities - total
|
|
$
|
6,996
|
|
|
$
|
284,087
|
|
Difference between undiscounted and discounted cash flows
|
|
$
|
392
|
|
|
$
|
43,719
|
|
The Company, Big 5 Corp. and Big 5 Services Corp. were parties to a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and a syndicate of other lenders, as amended (the “Prior Credit Agreement”), which was terminated and replaced on February 24, 2021, as discussed below.
On February 24, 2021, the Company entered into a Loan, Guaranty and Security Agreement with Bank of America, N.A. (“BofA”), as agent and lender (the “Loan Agreement”), at which time the Prior Credit Agreement was terminated. The Loan Agreement has a maturity date of February 24, 2026 and provides for a revolving credit facility with an aggregate committed availability of up to $150.0 million. The Company may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lenders under the Loan Agreement will have the option to increase the commitment to accommodate the requested increase. If such existing lenders do not exercise that option, the Company may (with the consent of BofA in its role as the administrative agent, not to be unreasonably withheld) seek other lenders willing to provide such commitments. The credit facility includes a $50.0 million sublimit for issuances of letters of credit.
Similar to the Prior Credit Agreement, the Company may borrow under the Loan Agreement from time to time, provided the amounts outstanding will not exceed the lesser of the then aggregate committed availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Line Cap”). As defined in the Loan Agreement, the “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a) 90.00% of eligible credit card receivables; plus (b) the cost of eligible inventory (other than eligible in-transit inventory), net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); plus (c) the cost of eligible in-transit inventory, net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible in-transit inventory (expressed as a percentage of the cost of eligible in-transit inventory), minus (d) certain agreed-upon reserves as well as other reserves established by BofA in its role as the administrative agent in its reasonable discretion.
- 14 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Generally, the Company may designate specific borrowings under the Loan Agreement as either base rate loans or LIBO rate loans. The applicable interest rate on the Company’s borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Line Cap over amounts borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as LIBO rate loans bear interest at a rate equal to the then applicable adjusted LIBO rate plus an applicable margin as shown in the table below. Those loans designated as base rate loans bear interest at a rate equal to the applicable margin for base rate loans (as shown below) plus the highest of (a) the Federal funds rate, as in effect from time to time, plus one-half of one percent (0.50%), (b) the LIBO rate, plus one percentage point (1.00%), or (c) the rate of interest in effect for such day as announced from time to time within BofA as its “prime rate.” The applicable margin for all loans is a function of Average Daily Availability for the preceding fiscal quarter as set forth below.
Level
|
|
Average Daily Availability
|
|
LIBO Rate
Applicable Margin
|
|
|
Base Rate
Applicable Margin
|
|
I
|
|
Greater than or equal to $70,000,000
|
|
1.375%
|
|
|
0.375%
|
|
II
|
|
Less than $70,000,000
|
|
1.500%
|
|
|
0.500%
|
|
The commitment fee assessed on the unused portion of the credit facility is 0.20% per annum.
Obligations under the Loan Agreement are secured by a general lien on and security interest in substantially all of the Company’s assets. The Loan Agreement contains covenants that require the Company to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances, and limits the ability to, among other things, 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. The Company may generally 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, although the Company is permitted to make up to $5.0 million of dividend payments or stock repurchases per year without satisfaction of the availability or fixed charge coverage ratio requirements, but dividends or stock repurchases made without satisfying the availability and/or fixed charge coverage ratio requirements will require the establishment of an additional reserve that will reduce borrowing availability under the Loan Agreement for 75 days. The Loan Agreement contains customary events of default, including, without limitation, failure to pay when due principal amounts with respect to the credit facility, failure to pay any interest or other amounts under the credit facility, failure to comply with certain agreements or covenants contained in the Loan Agreement, failure to satisfy certain judgments against the Company, failure to pay when due (or any other default which permits the acceleration of) certain other material indebtedness in principal amount in excess of $5.0 million, and certain insolvency and bankruptcy events.
As previously disclosed, the Prior Credit Agreement had a maturity date of September 29, 2022 and, as amended, provided for a line of credit up to $140.0 million, which amount could be increased at the Company’s option up to a maximum of $165.0 million. The Company could also request additional increases in aggregate availability, on an uncommitted basis up to a maximum of $200.0 million. On March 30, 2020, the Company exercised the accordion feature and increased the amount available under the revolving credit facility to $165.0 million in response to the COVID-19 pandemic and drew down additional amounts at that time. The revolving credit facility under the Prior Credit Agreement included a $25.0 million sublimit for issuances of letters of credit and a $20.0 million sublimit for swingline loans. The Prior Credit Agreement provided for LIBO rate loans to bear interest at a rate equal to the applicable adjusted LIBO rate plus an applicable margin, as shown in the table below. The loans designated as base rate loans bore interest at a rate equal to the applicable margin for base rate loans (as shown below) plus the highest of (a) the Federal funds rate in effect plus one-half of one percent, (b) the LIBO rate, plus one percentage point, or (c) the prime interest rate. Under the Prior Credit Agreement, the applicable margin for all loans was a function of Average Daily Availability for the preceding fiscal quarter as set forth below.
Level
|
|
Average Daily Availability
|
|
LIBO Rate
Applicable Margin
|
|
|
Base Rate
Applicable Margin
|
|
I
|
|
Greater than or equal to $70,000,000
|
|
1.250%
|
|
|
0.250%
|
|
II
|
|
Less than $70,000,000
|
|
1.375%
|
|
|
0.500%
|
|
The commitment fee assessed on the unused portion of the credit facility under the Prior Credit Agreement was 0.20% per annum.
- 15 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In the first quarter of fiscal 2021, the Company paid and capitalized $0.7 million in new creditor and third-party fees associated with the Loan Agreement, which will be amortized over the term of the Loan Agreement, and extinguished $0.2 million of deferred financing fees associated with the Prior Credit Agreement.
As of April 4, 2021 and January 3, 2021, the Company had no long-term revolving credit borrowings outstanding. As of April 4, 2021 and January 3, 2021, the Company had letter of credit commitments of $1.1 million and $2.6 million outstanding, respectively. Total remaining borrowing availability, after subtracting letters of credit, was $148.9 million and $162.4 million as of April 4, 2021 and January 3, 2021, respectively.
Under the asset and liability method prescribed under ASC 740, Income Taxes, the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The realizability of deferred tax assets is assessed throughout the year and a valuation allowance is recorded, if necessary, to reduce net deferred tax assets to the amount more likely than not to be realized. As of April 4, 2021 and January 3, 2021, the Company had a valuation allowance for deferred income tax assets of $0.5 million and $0.7 million, respectively, related to unused California Enterprise Zone Tax Credits, which the Company will no longer be able to carry forward beyond 2024 as a result of California’s termination of this program.
The Company files a consolidated federal income tax return and files tax returns in various state and local jurisdictions. The statutes of limitations for consolidated federal income tax returns are open for fiscal years 2017 and after, and state and local income tax returns are open for fiscal years 2016 and after.
The provision for income taxes for the 13 weeks ended April 4, 2021 reflects a $0.2 million favorable reduction of our previously established valuation allowance related to unused California Enterprise Zone Tax Credits and a $0.2 million disaster recovery credit related to fires in California. The provision for income taxes for the 13 weeks ended March 29, 2020 reflects the write-off of deferred tax assets of $0.4 million related to share-based compensation.
On March 27, 2020, the Federal government enacted the U.S. Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide relief from the impact of COVID-19. Among other relief, the CARES Act allows companies with a net operating loss (“NOL”) in either 2018, 2019 or 2020 to carry back those losses five years. As a result, the Company amended its 2018 income tax return to carry back its 2018 NOL to a period with a higher statutory tax rate in effect at that time, which is reflected in the Company’s effective tax rate in the first quarter of fiscal 2020.
As of April 4, 2021 and January 3, 2021, the Company had no unrecognized tax benefits including those that, if recognized, would affect the Company’s effective income tax rate over the next 12 months. The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. As of April 4, 2021 and January 3, 2021, the Company had no accrued interest or penalties.
- 16 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted-average shares of common stock outstanding, reduced by shares repurchased and held in treasury, during the period. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding share option awards, nonvested share awards and nonvested share unit awards. During periods of net loss, diluted loss per share is equal to basic loss per share because the antidilutive effect of potential common shares is disregarded.
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
13 Weeks Ended
|
|
|
|
April 4,
2021
|
|
|
March 29,
2020
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
21,546
|
|
|
$
|
(4,611
|
)
|
Weighted-average shares of common stock
outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,417
|
|
|
|
21,149
|
|
Dilutive effect of common stock
equivalents arising from share option,
nonvested share and nonvested share unit
awards
|
|
|
954
|
|
|
|
—
|
|
Diluted
|
|
|
22,371
|
|
|
|
21,149
|
|
Basic earnings (loss) per share
|
|
$
|
1.01
|
|
|
$
|
(0.22
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.96
|
|
|
$
|
(0.22
|
)
|
Antidilutive share option awards excluded
from diluted calculation
|
|
|
28
|
|
|
|
602
|
|
Antidilutive nonvested share and nonvested
share unit awards excluded from diluted
calculation
|
|
|
57
|
|
|
|
554
|
|
The computation of diluted earnings per share for the 13 weeks ended April 4, 2021 does not include certain share option awards that were outstanding and antidilutive (i.e., including such share option awards would result in higher earnings per share), since the exercise prices of these share option awards exceeded the average market price of the Company’s common shares. The computation of diluted earnings per share for the 13 weeks ended March 29, 2020 excludes all potential share option awards since the Company reported a net loss, and the effect of their inclusion would have been antidilutive.
The computation of diluted earnings per share for the 13 weeks ended April 4, 2021 does not include certain nonvested share awards and nonvested share unit awards that were outstanding and antidilutive, since the grant date fair values of these nonvested share awards and nonvested share unit awards exceeded the average market price of the Company’s common shares. The computation of diluted earnings per share for the 13 weeks ended March 29, 2020 excludes all potential nonvested share awards and nonvested share unit awards since the Company reported a net loss, and the effect of their inclusion would have been antidilutive.
- 17 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(9)
|
Commitments and Contingencies
|
Recovery of Insurance Proceeds
In the second quarter of fiscal 2020, seven of the Company’s stores were damaged and qualified for loss recovery claims as a result of civil unrest, and the Company disposed of assets of approximately $0.6 million related to lost inventory and property and equipment. In the first quarter of fiscal 2021, the Company reached an agreement with its insurance carrier and, after application of a deductible of $0.3 million, the Company received a cash insurance recovery of $1.3 million in total, of which $1.0 million related to the reimbursement of lost inventory and profit margin, $0.2 million related to the reimbursement of property and equipment, and $0.1 million related to a reimbursement for business interruption. Accordingly, the Company recognized gains of $0.5 million related to the recovery of lost profit margin and business interruption, and $0.2 million related to the recovery of property and equipment. The gain related to the recovery of lost profit margin and business interruption is included in the accompanying consolidated statement of operations as a reduction to cost of goods sold, and the gain related to the recovery of lost property and equipment is included in the accompanying consolidated statement of operations as a reduction to selling and administrative expense for fiscal 2021.
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.
(10)
|
Share-based Compensation
|
In April 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”) and stopped making grants under its 2007 Equity and Performance Incentive Plan, as amended and restated in April 2011 and April 2016 (the “2007 Plan”). As of April 4, 2021, 1,880,396 shares remained available for future grant under the 2019 Plan.
At its discretion, the Company grants share option awards, nonvested share awards and nonvested share unit awards to certain employees, as defined by ASC 718, Compensation—Stock Compensation, under the Company’s 2019 Plan, and accounts for its share-based compensation in accordance with ASC 718. The Company recognized $0.4 million and $0.5 million in share-based compensation expense for the 13 weeks ended April 4, 2021 and March 29, 2020, respectively.
Share Option Awards
Share option awards granted by the Company generally vest and become exercisable in four equal annual installments of 25% per year with a maximum life of ten years. The exercise price of share option awards is equal to the quoted market price of the Company’s common stock on the date of grant. No share option awards were granted in the first quarter of fiscal 2021. In the first quarter of fiscal 2020, the Company granted 257,000 share option awards with a weighted-average grant-date fair value of $1.25 per share option award.
A summary of the status of the Company’s share option awards is presented below:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(In Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 3, 2021
|
|
|
742,800
|
|
|
$
|
4.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(196,200
|
)
|
|
|
4.98
|
|
|
|
|
|
|
|
|
|
Outstanding at April 4, 2021
|
|
|
546,600
|
|
|
$
|
4.49
|
|
|
|
7.77
|
|
|
$
|
6,608,776
|
|
Exercisable at April 4, 2021
|
|
|
167,887
|
|
|
$
|
6.98
|
|
|
|
6.60
|
|
|
$
|
1,652,228
|
|
Vested and Expected to Vest at April 4, 2021
|
|
|
538,806
|
|
|
$
|
4.52
|
|
|
|
7.75
|
|
|
$
|
6,501,621
|
|
The aggregate intrinsic value represents the total pretax intrinsic value, based upon the Company’s most recent closing stock price of $16.48 as of April 4, 2021, which would have been received by the share option award holders had all share option award holders exercised their share option awards as of that date.
- 18 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The fair value of each share option award on the date of grant is estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
13 Weeks Ended
|
|
|
|
April 4,
2021
|
|
|
March 29,
2020
|
|
Risk-free interest rate
|
|
|
—
|
|
|
|
0.9
|
%
|
Expected term
|
|
|
—
|
|
|
5.7 years
|
|
Expected volatility
|
|
|
—
|
|
|
|
63.0
|
%
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option award; the expected term represents the weighted-average period of time that option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based upon the Company’s current dividend rate. In order to support its liquidity initiatives throughout the organization as a result of the COVID-19 outbreak, early in the second quarter of fiscal 2020 the Company’s Board of Directors suspended its quarterly cash dividend. Due to the uncertainty of future dividend payments when share option awards were granted in the first quarter of fiscal 2020, the Company used zero as the expected dividend yield assumption for share option awards granted at that time.
As of April 4, 2021, there was $0.4 million of total unrecognized compensation expense related to share option awards granted. That expense is expected to be recognized over a weighted-average period of 2.3 years.
Nonvested Share Awards and Nonvested Share Unit Awards
Nonvested share awards and nonvested share unit awards granted by the Company vest for employees from the date of grant in four equal annual installments of 25% per year. Nonvested share awards and nonvested share unit awards granted by the Company to non-employee directors for their service as directors, as defined by ASC 718, vest 100% on the earlier of (a) the date of the Company’s next annual stockholders meeting following the grant date, or (b) the first anniversary of the grant date.
Nonvested share awards become outstanding when granted and are delivered to the recipient upon their vesting. Shares issuable related to nonvested share unit awards, including any dividend reinvestments, are delivered to the recipient on the tenth business day of January following the year in which the recipient’s service to the Company is terminated, at which time the units convert to shares and become outstanding. The total fair value of nonvested share awards which vested during the first quarter of fiscal 2021 and 2020 was $2.8 million and $0.3 million, respectively. No nonvested share unit awards vested during the first quarter of fiscal 2021 or 2020.
The Company granted 235,480 and 241,600 nonvested share awards in the first quarter of fiscal 2021 and 2020, respectively. The weighted-average grant-date fair value per share of the Company’s nonvested share awards granted in the first quarter of fiscal 2021 and 2020 was $14.89 and $1.50, respectively.
A summary of the status of the Company’s nonvested share awards is presented below:
|
|
Shares
|
|
|
Weighted-
Average Grant-
Date Fair
Value
|
|
Balance at January 3, 2021
|
|
|
591,325
|
|
|
$
|
3.79
|
|
Granted
|
|
|
235,480
|
|
|
|
14.89
|
|
Vested
|
|
|
(188,550
|
)
|
|
|
5.91
|
|
Forfeited
|
|
|
(3,520
|
)
|
|
|
4.03
|
|
Balance at April 4, 2021
|
|
|
634,735
|
|
|
$
|
7.28
|
|
- 19 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
To satisfy employee minimum statutory tax withholding requirements for nonvested share awards that vest, the Company withholds and retires a portion of the vesting common shares, unless an employee elects to pay cash. In the first quarter of fiscal 2021, the Company withheld 70,228 common shares with a total value of $1.0 million. This amount is presented as a cash outflow from financing activities in the accompanying interim unaudited condensed consolidated statement of cash flows.
A summary of the status of the Company’s nonvested share unit awards is presented below:
|
|
Units
|
|
|
Weighted-
Average Grant-
Date Fair
Value
|
|
Balance at January 3, 2021
|
|
|
41,160
|
|
|
$
|
1.91
|
|
Dividend reinvestments
|
|
|
2,574
|
|
|
|
14.73
|
|
Dividend reinvestments vested
|
|
|
(2,155
|
)
|
|
|
14.73
|
|
Balance at April 4, 2021
|
|
|
41,579
|
|
|
$
|
2.04
|
|
As of April 4, 2021, there was $4.2 million and $15,000 of total unrecognized compensation expense related to nonvested share awards and nonvested share unit awards, respectively. That expense is expected to be recognized over a weighted-average period of 2.7 and 0.2 years for nonvested share awards and nonvested share unit awards, respectively.
On April 29, 2021, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.18 per share of outstanding common stock, which will be paid on June 15, 2021 to stockholders of record as of June 1, 2021, and declared a special cash dividend of $1.00 per share of outstanding common stock, which will be paid on June 1, 2021 to stockholders of record as of May 17, 2021.
- 20 -