HOTT Hot Topic, Inc. (MM)

Big 5 Sporting Goods Corp. (BGFV) posted robust fourth-quarter 2012 results with earnings rising nearly four-fold to 19 cents per share against 5 cents reported in the comparable year-ago quarter. The year-over-year increase was primarily driven by strong sales growth and improved margins. Moreover, the quarterly earnings of this Zacks Rank #2 (Buy) company came a penny ahead of the Zacks Consensus Estimate.

Quarter in Detail

Net sales for the quarter increased approximately 7.4% to $243.6 million compared with $226.7 million in the fourth quarter of 2011 and surpassed the Zacks Consensus Estimate of $242.0 million. Sales in the quarter mainly benefited from favorable weather conditions during winter as well as the company’s ongoing merchandise and marketing initiatives.

Same-store sales increased 6.5% over the year-ago quarter, driven by improvement across all geographies as well as all major product categories of apparel, footwear and hard goods.

The company witnessed a high-single-digit growth in average ticket and demonstrates efficient expense leverage, which aided it to boost merchandise and operating margins, ultimately driving earnings growth. However, Big 5 observed a fall in customer traffic of low-single digit.

Gross profit in the quarter increased 10.9% to $78.4 million, while gross profit margin expanded 100 basis points (bps) to 32.2% due to a 20 bps improvement in merchandise margins, coupled with the leveraging of store occupancy and distribution expenses.

Selling and administrative expense, as a percentage of net sales, contracted 210 bps to 29.2%. However, in dollar terms, selling and administrative expenses increased $0.4 million to $71.2 million. The escalation is primarily attributable to increased store-related expenses due to higher store count and elevated employee benefit-related costs, which were somewhat offset by reduced advertising expenses.

Operating income for the quarter stood at $7.2 million against a loss of $0.2 million reported in the fourth quarter of 2011. Consequently, operating margin came at 2.9%. The year-over-year improvement in operating margin was primarily driven by increased gross profit margin and reduced selling and administrative expenses as a percentage of sales.

Financial Update

Big 5 ended the year with cash and cash equivalents of $7.6 million compared with $4.9 million in 2011. The company’s inventory levels at the end of 2012 remained flat year over year at $270.4 million on a per-store basis.

During the fiscal, the company generated a cash flow of $39.6 million from its operational activity. The improved cash flow facilitated it to reduce credit facility by 25% to $47.5 million, invest in store opening and remodeling activities, and distributed $10.0 million to shareholders in the form of share repurchase and dividend payments. Shareholders’ equity at the end of the year stood at $164.4 million.

The company continues to enhance shareholder value by returning cash in the form of dividends and share repurchases. Subsequent to the earnings results, Big 5 declared a quarterly cash dividend of 10 cents per share, reflecting an increase of 33.3% from the last paid dividend of 7.5 cents. Dividend will be paid on Mar 22, 2013 to shareholders of record as of Mar 8, 2013.

In the fourth quarter, the company bought back 40,000 shares valued at $0.4 million. As of Dec 30, 2012, the company had nearly $9.6 million available for buyback under its ongoing $20.0 million authorization, approved in the fourth quarter of 2007.

Store Update

In the reported quarter, Big 5 inaugurated 8 stores and closed one, increasing its store count at the end of fiscal to 414 stores. Of those opened in the quarter, one store was relocated.

Guidance

In anticipation of favorable weather conditions in winter and higher demand for firearms and ammunition products, management expects same store sales in the first quarter of 2013 to grow in the high-single-digit range. Further, the company anticipates earnings for the quarter to come between 18 cents and 24 cents per share.

Looking ahead, Big 5 plans to open one new store, while it has shuttered one store related to relocation since the beginning of the first quarter of 2013. For full-year 2013, the company targets to open nearly 15 to 20 new outlets, of which three will be relocations. Further, the company plans to close 3 relocated stores.

Other Stocks to Consider

Apart from Big 5, other stocks in the sporting goods retail industry worth considering include Hot Topic Inc. (HOTT), Cabela’s Inc. (CAB) and Marinemax Inc. (HZO). All these stocks hold a Zacks Rank #2 (Buy).

 
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