Big 5 Sporting Goods Stock Analysis

Taking a look at a struggling retailer trading at a deep discount to asset value

Business Description

A few weeks ago I summarized Big 5 Sporting Goods in my Idea List post, so this week I am taking a closer look at the company. Big 5 Sporting Goods BGFV 0.00%↑ is a regional sporting goods retailer that has stores located primarily in California and other western states. The stock is down 70% this year and is trading at a deep discount to its assets. This deep discount interests me, but retailers are a tough businesses and BGFV is seeing declining sales and negative earnings. Big 5 currently has 425 stores, which has been roughly flat for 10 years. The management wants to “cautiously” expand store count, and apparently haven’t found it worthwhile to increase count. A few stores a year are shut down, and new ones opened, and others get renovated, but on balance the store count doesn’t move much.

Average store size for Big 5 is about 12,000 sqft compared to Dick’s Sporting Goods stores that are about 30-50,000 sqft. Big 5 stores are typically located in smaller cities in strip centers, where Dick’s stores are in big commercial areas. About half of Big 5’s sales come from “hard goods” which is sports equipment, while the other half is apparel and shoes.

Big 5’s stock price saw a steady decline from 2017 to the COVID lows in 2020. Then in 2020 due to increased in outdoor spending lifting sales, BGFV’s stock price soared. I believe it got caught up in the meme stock hype, sending the stock price from $0.70 at the low to a brief peak of $44. Since then the sales have declined below 2019 levels and the stock price has sold off below $2. Currently Big 5’s market cap is about $40M, so it is a fraction of Dick’s $18B market cap. During the period of increased sales a couple of years ago, BGFV had large profits that it used to pay down debt and did a special dividend. Now it is losing about $10M a quarter and eliminated their dividend last quarter.

Why its Cheap

Big 5 optically looks cheap, but retail is a tough business so I want understand if the company is going through a temporary set back, or is in an existential crisis. I think a lot of the stock price movement in 2020-2023 has to do with irrational meme stock forces, so much of the stock price decline is probably do to these shareholders exiting. Like I mentioned before, sales and profits rose from 2019 levels and then are now worse than 2019. Revenue grew from $996M in 2019 to $1.16B in 2021 and has dropped down to $830M TTM. For about a year, management has been saying that the softening sales is due to inflation and a pull back in consumer spending. That seems reasonable, with a lack of further detail from the CEO, it makes me worried that there is more going on.

One thing that troubles me is that Dick’s has been growing sales and earnings, and has had very good stock performance. One thought was that maybe Dick’s is encroaching on Big 5’s territory. Dick’s has about 40 stores in California where Big 5 has like 200. So this could be a partial explanation but not conclusive. BGFV’s stores are much smaller and in different locations than where Dick’s would put a store. However I am not sure this differentiation is a benefit or not for Big 5. Since I don’t live on the west coast, I am not sure the demographic that goes to Big 5. Maybe its more lower income spenders compared to Dick’s, which might lend some credence to the inflation hurting consumer spending since I’ve heard lower income people are cutting back their spending the most.

Obviously there is the threat of ecommerce, but it is hard for me to tell how much that is impacting Big 5. I think shoes and sports equipment might be more resilient to online shopping since there is some value in seeing and touching the product in person, especially if it is for sports instead of every day use. Skimming Dick’s annual report, I get the impression that Dick’s doesn’t have that strong of online sales, although its something they are trying to grow. Also I think people over exaggerate the retail is dying narrative. There will be some winners like specialty retailers like Tractor Supply, and losers such as generic department stores like Sears. That being said, I am on the fence whether Big 5 can exist in the changing retail environment.

As a quick aside, I wanted to compare Big 5 to Big Lots, another retailer that looked cheap but now is on the verge of bankruptcy. Big Lots was humming along but suddenly over the past year the company went into a death spiral. It appears a big cause of the problems occurred when Big Lots started taking on long term debt right as EBITDA went massively negative. These figures are not consecutive or in chronological order, but Big Lots had 5 quarters of EBITDA losses that amounted to 70, 80, 90, 120, 220 million dollars. This resulted in equity value taking 30-50% hits per quarter. With negative EBITDA, Big Lots did not have enough cash flow to cover its debt, and now there is just a sliver of equity value leftover. So far, BGFV is taking ~10M EBITDA losses that are about 4% of its equity. Also Big 5 has no debt. So currently BGFV is not in the same situation as Big Lots, but if it starts moving towards that direction then it would be time to run for the hills.

Valuation

Big 5 is currently has a stock price of $1.90 (it was $1.50 few days ago but has recently run up in price) but its book value is $10.25. Looking at it from a net-net perspective, BGFV has a NCAV of $3.66 if you adjust for lease liabilities. Although most of that net current asset value is in inventory which is not ideal when looking at net-nets. Since it is unclear if Big 5 is in a temporary rut or is in secular decline, I think it would be conservative to run the numbers by reducing the value of their inventory by half. This adjusted book value is coincidentally the same as my NCAV figure. For additional context, looking at pre-COVID the stock slid down during the second half of 2018 and bounced around 0.5-1x book value (but mostly towards the lower end of the range) until 2020. It has been several years since GBFV has traded at book value, but it could be reasonable for it to trade around half of book value.

Looking at book value isn’t the full picture though since Big 5 is losing money. Cumulatively over the past 3 quarters the company has lost $23.5M, and is guiding to lose about $4M this quarter. Big 5 can weather these losses if they subside fairly quickly, but not if they persist or worsen. One thing that will help is the company eliminating their dividend, which saves them $20M a year. Capex is usually about $10M a year that maybe they can dial back but some projects could be ongoing where you can’t stop them. Big 5 also spends about $10M a year on marketing that they could reduce. So there seems to be some things that can be done to provide some breathing room in order to sustain working capital.

A prudent option could be to wait until the losses subside before buying BGFV, but knowing my luck as soon as that happens the stock will rebound. The company has a credit facility, although I am not sure if they can currently use it because it requires a positive EBIT figure. Even if they can tap the credit facility, I would get nervous because that could be a sign of a death spiral like Big Lots. The other option is that a cash crunch could lead to an expensive recapitalization such as issuing stock or having to issue a disadvantageous convertible preferred stock or something.

At the end of the day, Big 5 is a pretty nasty stock, but sometimes that’s where you make the money. At its current state, I think a fair value of $3.50 is reasonable, which is a big upside from its current price. I may buy some shares, but since I’m on the fence with regards to Big 5’s prospects, I’ll keep my position size relatively small and quickly sell if losses increase in magnitude or if there is some sort of recapitalization.