Big 5 Sporting Goods — $BGFV: Why even Warren Buffet would appreciate this massive value play
$BGFV- Big 5 Inc. is a sporting goods retailer in the USA, operating over 400 stores and an e-Commerce platform. Big 5’s product mix contains athletic shoes, apparel & accessories, outdoor & athletic equipment, fitness product, camping & outdoor products, sports gear, and winter/summer recreational gear. Big 5 sells brands such as Adidas, Nike, Rawling, Under Armour etc. and they offer merchandise under their own private label (which represents 2% of total sales). A list of the largest brands they carry can be found below.
As of their Q3 2021 report, Big 5 has 429 stores that are open and operating, which is down from their 2018 high of 436 stores. Their recent store closures all stem from the impacts that COVID had on the retail sales environment and is not of huge concern.
Big 5 reports their revenues under 2 main segments: Soft Goods (athletic apparel and footwear), and Hard Goods. These will be referenced later in this analysis.
Big 5 has noted that seasonality has influenced their buying patterns. This is due to Big 5 purchasing their inventory one season in advance. This early purchasing can help them to reduce costs by buying items “not in season” and holding them in inventory until they “are in season” and sell for a premium. The only problems with this are having the necessary space to store all of this inventory. Furthermore, if the cost required to store these items exceeds the amount saved by purchasing them in advance, they may be doing a disservice to their cost of goods sold, and their operating margins. Furthermore, having all of this inventory can only work if their inventory turnover ratio is low. Big 5’s Inventory Turnover Ratio is 2.96, this ratio is rather low, and implies that they will sell all of their bought inventory within 124 days of receiving their inventories. However, we know that Big 5 takes on excess inventories, so a ratio that is this low is to be expected. Furthermore, Big 5 is buying the items a season ahead of time, so it would make sense that the ratio is approximately 3 as opposed to 4, as the inventory is stored for 1 season (91 days), and is sold within 33 days of the inventory’s “season” (which is quick considering their purchasing logic).
Big 5 has 429 stores in various states in Western USA. The number of stores by state can be found below.
As stated previously, Big 5 operates in Western USA (primarily California). Their current positioning will allow them to grow their operations Nationally (if that is what they choose to do) , however, they already service the USA in terms of their Commerce platform (so having stores in each state may not be necessary).
This sectioned is designed to give you (the reader) insight into the background of the highest (executive) managers/officers at Big 5. The following people are listed as the highest-ranking members of the Big 5 Management Team.
Steven Miller (President & Chief Executive Officer): Steven G. Miller is Chairman of the Board, President, Chief Executive Officer of Big 5 Sporting Goods Corporation. He has served as Chairman of the Board, Chief Executive Officer and President since 2002, 2000 and 1992, respectively. He has also served as a director since 1992. In addition, he served as Chief Operating Officer from 1992 to 2000 and as Executive Vice President, Administration from 1988 to 1992.
Barry Emerson (Executive VP, Treasurer & Chief Financial Officer): Barry Emerson has been the CFO and Treasurer of Big 5 Sporting Goods Corp. since October 2005 and the Senior VP since September 2005. Mr. Emerson served as Vice President, Treasurer and Chief Financial Officer of U.S. Auto Parts Network Inc. and at Elite Information Group Inc. (at different times), from May 1999 to July 2005. With more than 20 years of experience in finance management, Mr. Emerson has accrued substantial experience in managing the financial and administrative activities of a business; including areas of investor relations, Board of Directors, financial reporting, acquisitions, and building relationships with lending institutions. Mr. Emerson is a Certified Public Accountant of AICPA with an MBA in Finance from UCLA. He earned his bachelor’s degree in accounting from California State University, Long Beach.
Boyd Clark (Executive VP & Chief Merchandising Officer): Mr. Clark brings 35 years of retail experience, including 30 years as a buyer or merchandise manager. Mr. Clark has served in Big 5’s Buying Department since 1992, and as Vice President of Buying, for the last 12 years. Prior to joining the Company, Mr. Clark was a buyer and divisional merchandise manager at another regional retailer and an independent manufacturer sales representative in the sporting goods industry.
As you can see, Big 5’s top 3 Executive Officers have sufficient experience in their respective fields, which makes me confident that Big 5’s Management Team can lead this business into the future and make the right decisions on behalf of the company, and their shareholders.
If you take a quick look at Big 5’s historical dividend pays outs, you will quickly notice how sporadic their payments are. In this section I will try to explain the reasoning behind their odd dividend payments. Firstly, in 2020 you will notice that they only paid out 3 dividends (as opposed to their regular 4 dividends). This is due to them missing their Q2 2021 dividend payment, which they explained was due to the uncertainties during the start of COVID (they had to shut down the operations of various stores). However, they quickly rebounded in Q3 and operations restarted, which was why they were able to re-instate and raise their dividend payments back to their usual schedule.
Additionally, Big 5 had some odd dividend payments during 2021. Firstly, they decided to raise their divided in Q1 2021 to $0.15/share, which was due to their great financial performance. In Q2 2021, Big 5 decided to increase their dividend again to $0.18/share.
However, there was another dividend payment before their Q2 dividend. This payment was a special dividend of $1/share paid 2 weeks prior to their 2021 dividend. In their 8-K disclosure they noted “Additionally, to further return value to shareholders, the Company’s Board of Directors has 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”, as being the reason they paid their special dividend, however some have speculated it was to fuel a short squeeze (as their short interest was very high at this time).
Next up was their Q3 2021 dividend, which yet again was increased. This time it was increased to $0.25/share, which has persisted with their Q4 2021 dividend.
Lastly, between their Q3 and Q4 dividend they paid another special dividend of $1/share. Once again, Big 5 stated that this was due to their strong financial performance, and yet again there were people speculating that it was to fuel a short squeeze.
This year, BGFV’s dividend yield was 4.3% when factoring out their special dividend. However, when including their special dividend payments, their dividend yield was 14.5%.
In order to undergo the comparable analysis, we need to get an idea of their closest competitors. These competitors must operate in the same space, operate in similar geographies, be of similar market cap, and have valid financial ratios. Using this criterion, I came up with the following.
- $DKS — Dick’s Sporting Goods: DICK’S Sporting Goods is a sporting goods retailer in the eastern United States. It provides hardlines, including sporting goods equipment, fitness equipment, golf equipment, and hunting and fishing gear products; apparel; and footwear and accessories. Currently, there are 730 DICK’S Sporting Goods stores across the USA.
- $ASO — Academy Sports and Outdoors: Academy Sports operates as a sporting goods and outdoor recreational products retailer in the United States. The company sells outdoor equipment, accessories, and apparel as well as sporting equipment, accessories, and apparel. Furthermore, Hibbett is licensed to sell professional and collegiate team apparel and accessories. ASO operates 259 retail locations in 16 states and three distribution centers located in Katy, Texas, Twiggs County, Georgia, and Cookeville, Tennessee. The company also sells merchandise to customers through academy.com website.
- $HIBB — Hibbett Inc.: Hibbett Sports retails athletic-inspired fashion products in small and mid-sized communities in the United States. Its stores offer a range of merchandise, including athletic footwear, athletic and fashion apparel, team sports equipment, and related accessories. Currently, there are 1,067 Hibbett retail stores, which include 882 Hibbett Sports stores, 167 City Gear stores, and 18 Sports Additions athletic shoe stores. It also sells its products through online channels.
- $FL — Foot Locker: Foot Locker operates as an athletic footwear and apparel retailer. Footlocker sells athletic footwear, apparel, accessories, equipment, and team licensed merchandise under the Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, Footaction, Runners Point, and Sidestep brand names. Currently, there are 2,998 retail stores in 27 countries across the United States, Canada, Europe, Australia, New Zealand, and Asia.
- Yearly Financial Performance (Good): In 2020, Big 5 was able to increase their net sales by 5% YoY, while managing to limit their COGS increase to 1.1% (which contributes to better gross margins). Additionally, Big 5 was able to increase their operating income by approximately 400%, thereby increasing their net income by over 500%. These sizable increases in operating income and net income, can be attributed to Big 5’s cost management over the course of 2020.
- Yearly Financial Performance (Bad): In 2020, there was little to complain about when discussing Big 5’s financial performance. Over the course of 2021, Big 5 added approximately 160,000 shares to their outstanding shares balance, indicating a 0.7% share dilution (which is smaller than their dividends (factoring out the special dividends). Furthermore, Big 5’s footwear sales fell by 18%, and their apparel sales fell by 16% over the course of 2020.
- Q3 2021 Financial Performance (Good): In Q2 2021, Big 5 managed to decrease their COGS from Q3 2020 by 7%, which helped them to limit the decrease in gross profit. Big 5 was able to increase their revenues in the following categories; Footwear by 25%, and apparel by 17%.
- Q3 2021 Financial Performance (Bad): Conversely, in Q2 2021, Big 5 had a subpar financial performance. They experienced the following decreases compared to Q3 2020; Sales decreased 5% (due to an 18% decrease in their hard goods revenues (largest contributor to total sales)), Gross Profit decreased by 1.2%, Operating Income decreased by 15%, net income decreased by 15% as well. Lastly, they experienced a 2% share dilution YoY.
2019 Equity Incentive Plan:
Big 5 has 3,848,803 shares that they can issue under their equity incentive plan over the next 10 years. Which could dilute shares by 18.4% during this time (1.7% per year). This is not that significant, as they offer dividends higher than this 1.4% benchmark. Furthermore, Big 5 has $15.3M held for share repurchasing, which represents roughly 700,000 shares to be repurchased, which will help to offset the potential dilution they might face over the next 10 years.
By comparing Big 5’s financial ratios to that of their publicly listed competition (listed above in the “competitors” section) I found the following:
Based off of Big 5’s Price to Earnings Ratio in comparison to their competitors, $BGFV stock should be valued at $27.13/share, which would imply a share price increase of 40%.
Big 5’s PEG ratio (compared to their counterparts) indicates that the BGFV stock should have a fair value of $19.45/share, which would imply their stock is currently at it’s fair value. This comparable reflects a different story than the P/E multiple, which is why I decided to compare their EV/EBITDA multiple as well.
Big 5’s EV/EBITDA ratio indicates that their fair value is $32/share, which would translate into a potential upside of 65%. All 3 comparable analyses are in agreeance that Big 5 is at or under their fair value, however the results vary heavily.
Due to the variability between comparable analyses, I decided to take average the 3 comparable results. By doing this I arrived at a final comparable valuation of $26.19, which implies an upside potential of 35%
By inputting the necessary data into my DCF model, I arrived at a fair valuation of $BGFV stock of $54.82/share, which implies an upside potential of 180%.
In order to provide simplicity, I wanted to come to one final, all-encompassing valuation for the $BGFV stock. I did this through taking the average valuation of the Average Comparable, and the DCF model. By doing this I arrived at a price target for the $BGFV stock of $40.51/share, which implies an upside of 108%.
My plan for an investment in the $BGFV stock would go as follows:
- Enter into a position below the fair value, preferably at/below $20/share.
- Hold long-term (with dividend re-investment)
- Re-evaluate the position as new data is released (especially their financial reports to see if they continue their growth, or if their growth starts to fall short of expectations).
Originally published at https://utradea.com.