California-based athletic equipment and apparel company Big Five Sporting Goods (NASDAQ: BGFV) has its rally cap on and investors may want to take notice.
On July 9th Big Five reported preliminary second-quarter results that caught the market off guard. After recording a net loss of 3 cents per share a year ago, it expects earnings per share (EPS) to be in the $0.52 to $0.54 range.
Revenue is expected to come in around $228 million. Although this would mark a 28% decrease year-over-year, amid stores reopening and solid online business, sales were up 15% in the latter half of the quarter compared to the same period last year. Strong sales volume and a lower cost structure are driving margin improvement and a healthier bottom line.
An equally important piece of the second quarter preview was that Big Five's net debt is expected to be down to $18 million compared to $56 million just 12 months prior. A strengthening balance sheet is always a positive development and continued progress in this area would score bonus points with investors.
The company is scheduled to formally report second-quarter performance on August 4th. Although investors now know what to expect, it is what lies ahead that is intriguing.
In its 65th year in the business, the sporting goods retailer finally appears to have some much-needed wind at its back. With an improving fundamental backdrop and post-pandemic growth opportunities on the horizon, Big Five looks to be on the verge of a possible late-inning comeback.
Online Shopping, Geographic Expansion offer Growth Potential
Big Five is well-positioned to capitalize on an accelerated trend in online shopping that has arisen from the COVID-19 pandemic. Shoppers are placing greater value on safety and convenience and Big Five's online pickup and delivery services have been well received.
The company has a growing e-commerce presence rooted in its E-Team program which features a digital weekly ad and weekly coupons for its growing subscriber base. As the business mix has shifted online, advertising, payroll, and other expenses have come down. These trends are likely to continue and drive sustainable profit growth.
Meanwhile, after closing all physical retail locations due to the pandemic, stores have reopened. This will only help sales which have been resilient in recent months despite the store closures as Big Five's curbside pickup business and online channels have picked up the slack. With gyms closed and many sports activities put on hold, consumers clamoring for outdoor activity have turned to Big Five for items like running shoes, fitness apparel, and fishing gear.
Its retail footprint includes 431 stores across 10 states from the West Coast to as far east as Texas. Big Five has opportunities to stretch into the eastern parts of the country. Absent a presence in 40 states, it has huge untapped market potential. Establishing a presence on the East Coast would be a major step into a highly competitive but potentially lucrative retail market. Big Five would have to battle strong competitors such as Dick's Sporting Goods and Hibbett Sports, but given the market size, there are share gains to be had.
According to the economic statistic website Statista, the U.S. sporting goods market generates around $45 billion in annual sales. If Big Five can leverage its business model and effectively compete on account of its strong product assortment, customer service, and price it can make inroads in both existing and new states.
Big Five's product lineup has expanded over the years going well beyond traditional sporting equipment and into footwear, apparel, fishing, hunting, and toys.
Volume Spike Suggests There is More to Come
In response to the July 9th earnings pre-announcement, Big Five shares jumped from $1.92 to $2.68 for a one-day gain of 40%. More importantly, the trading volume was massive as more than 37 million shares traded hands.
Often when a stock gaps higher in heavy volume that is a sign of good things to come. The low volume pullback in the stock price since the gap up has created an attractive entry point.
The bulls appear to be in control of Big Five at this point. The chart also shows that a bullish crossover of the 50-day moving average and the 200-day moving average may be imminent.
While the April 2020 bottom of $0.65 was the ideal entry point, investors now have confirmation of some positive momentum in the business that can drive the stock higher. The Big Five train may be leaving the station. Investors that get on board now have the potential to hit at least a double over the next 12 months.
Insiders, Hedge Funds Giving Big Five a Sporting Try
Of course, like other retailers, the near-term fate of Big Five will largely be dictated by the pace of the economic recovery. Regressive steps related to the COVID-19 pandemic would certainly slow the company's rebound potential. Cancelled youth and adult sporting leagues and fewer family picnics could result in lower demand for sporting and camping goods.
As a highly volatile stock trying to dig itself out of a slump, Big Five is certainly in the speculative category. But it may be worth taking at swing at here. The stock trades at 6x forward earnings compared to its historical average forward P/E multiple of 10x.
Another intriguing aspect of the stock is that 36% of Big Five shares are held by corporate insiders. The last nine insider transactions have been purchases made by a series of Directors. It's always good to see a Board that has skin in game.
A pair of hedge funds have also been getting into the Big Five game. In the first quarter of this year GMT Capital and Gamco Investors combined to scoop up 1.5 million shares worth roughly $1.83 million.
Big Five also pays a $0.05 quarterly dividend which may seem small, but currently amounts to a 7.8% forward dividend yield. This gives investors a bit of an income cushion on top of the growth potential.
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