Inside the Call: The 5 Big Details About Post-Pandemic Margin Benefits
Big 5 Sporting Goods, Inc. forecast a sharp drop in first-quarter results as the chain faces high pandemic demand in the prior-year period. However, Big 5 officials expect the improvement in margin rates seen over the past two years to continue.
Like other retailers in the space, Big 5 margins have benefited from reduced promotional pressures in a lean inventory environment due to supply chain disruptions caused by the pandemic.
On a conference call with analysts, however, Steve Miller, Chairman, President and CEO, said the Big 5’s recent margin improvement was driven, in part, by a shift in its promotional strategy that was already increasing margins before the pandemic with accelerated improvement. during the pandemic.
Miller said, “Historically, our model has revolved around print advertising focused on product-by-product, price-driven promotions, typically weekly. As we reduced print advertising, we opened up more flexibility in our buying and pricing, which benefited our product mix and margins, not to mention significantly reduced our advertising spend.
Commodity margins increased by 194 basis points in the last fourth quarter compared to the fourth quarter of 2020 and by 437 basis points compared to the fourth quarter of 2019. Compared to the fourth quarter of 2018, commodity margins increased by more than 600 basis points.
The better-than-expected margin improvement is why the Big 5 on Jan. 16 issued an update increasing its fourth-quarter EPS guidance. At the time, the Big 5 said it expected earnings in the range of 84 cents to 86 cents, up from previous forecasts in the range of 55 cents to 70 cents.
In the fourth quarter ended Jan. 2, net income came in at $19.9 million, or 89 cents per share, above the high end of the updated guidance range. That’s down 5.2% from $21.0 million, or 95 per share, in the fourth quarter of fiscal 2020, although the prior year period included a 12 cent per share benefit. action from an insurance settlement.
Gross margins were 37.7% in the fourth quarter of fiscal 2021 compared to 35.2% in the fourth quarter of the prior year. The increase in gross margin also reflects lower distribution costs, including costs capitalized to inventory, as a percentage of net sales, partially offset by the favorable impact of an insurance settlement during the period. of the previous year.
SG&A expenses, as a percentage of sales, were 27.9% in the fourth quarter versus 25.6% a year ago. Overall, SG&A expenses increased by $1.8 million over the prior year, primarily due to higher store-related costs, as well as higher advertising expenses, which remained significantly lower than pre-pandemic levels. The prior year comparison also reflects the favorable impact of the prior year insurance settlement period.
Net sales in the quarter fell 5.9% to $273.4 million, reflecting the past 13 weeks compared to a 14 week period a year ago. On the same 13-week year-over-year basis, same-store sales increased 0.2% year-over-year and 10.6% from the fourth quarter of 2019 before the pandemic.
The results were in line with its initial guidance calling for year-over-year same-store sales in the negative low-single digit to positive low-single digit range.
By month, Miller said October sales were up slightly from 2020 and up in the mid-teens from 2019. November sales were down to high single digits from 2020 and down single digit from 2019.
Miller said: “November’s mildness was primarily due to abnormally warm weather conditions coupled with supply chain disruptions which inhibited our ability to take full advantage of key Black Friday periods.”
December sales were up in the mid-single digits of 2020 and mid-teens compared to 2019. Miller said: “We saw particular strength in the last two weeks of the year when the wintry weather very favorable finally arrived in our markets and stimulated the sales of winter-related products.
From a category perspective, apparel and footwear continued to strengthen, both up double digits from a year earlier. Miller noted that pandemic-related factors negatively impacted both categories.
On the other hand, durable goods saw a double-digit decline year-on-year. Durable goods in 2020 were up nearly 40% from 2019, driven by pandemic-related demand for products such as home fitness and outdoor recreation.
For the year, Big 5 sales hit a record $1.16 billion in the 52-week 2021 fiscal year, up 11.5% from sales of $1.04 billion for the 53-week fiscal year 2020. On the same 52 week basis, same store sales were up 13.9% year over year and 17.5% from 2019.
Big 5 opened five stores and closed four stores in 2021, including two relocations to end the year with 431 stores. In 2022, it plans to open about six stores and close about two stores.
Inventories increased by 7.1% compared to the previous year and by 13.4% compared to 2019.
Big 5 chief financial officer Barry Emerson said inventory levels are “generally a bit lower than we would have liked” due to supply chain disruptions amid high demand. He added: “However, one of the benefits of our reduction in print advertising is that we are now able to operate with less inventory than we have historically had. We will continue to manage supply chain issues, although there are areas where we would definitely like to have more inventory. We think our assortment is generally well positioned for spring. Our inventory is very fresh and we operate with significantly less clearance inventory than we have historically.
The Big 5 ended 2021 with zero borrowings under its credit facility on a cash balance of 97.4 million, compared to zero borrowings and 64.7 million cash at the end of 2020.
Regarding the current quarter, Big 5 said that in the first two months of its first quarter, most categories are doing well compared to pre-pandemic times, but overall sales are down by around 12% from last year’s record first quarter results when Big 5 saw a 31.8% jump in same-store sales.
“Last year, in the first quarter, our sales benefited from strong COVID-related demand and a favorable winter in our markets,” Miller said. “In January this year, sales were down around 20% as we faced a number of headwinds including an unusually warm and dry winter in our markets, the impact of the surge in ‘Omicron and the continued supply chain disruption.
He added: “Our trends improved in February with same-store sales up slightly as the impacts from Omicron eased and last week for the first time this calendar year. Finally, we benefited from a favorable winter cold snap in our main markets. As we look to March, we face some very tough competition compared to last year, when sales benefited greatly from the easing of COVID restrictions and the resumption of in-person schooling and sports leagues. as well as the distribution of stimulus checks.
For the quarter, the Big 5 expects same-store sales to decline 10% to 13%, with EPS in the range of 30 to 40 cents. That compares with a same-store sales increase of 31.8% and record first-quarter EPS of 96 cents in the first quarter of the prior year, which included previously reported net income of 6 cents per share.
Miller said that while guidance expectations are lower than the record first-quarter results of the prior year, its guidance range reflects first-quarter earnings that would be near or above any pre-first-quarter earnings. -pandemic in its history.
Miller concluded, “Our past seven quarters have been the seven most profitable quarters in our company’s history. While we have set the bar high and we and others in the retail industry will no doubt continue to face many pandemic-related challenges, including supply constraints and staffing issues. , we have a proven track record of successfully adapting to challenges and are confident in our ability to continue to thrive in these dynamic environments. We are a stronger company with an improved operating model and are well positioned to continue to generate healthy bottom lines.
Photo courtesy Big 5