Big 5 Sporting Goods: Dividend Yield Nearly 13%; Is It A Buy? (BGFV)
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Big 5 Sporting Goods: Dividend Yield Nearly 13%; Is It A Buy? (BGFV)

Aug 16, 2023


Big 5 Sporting Goods (NASDAQ:BGFV) is a traditional sporting goods company that offers a wide variety of products. Their mix includes athletic shoes, apparel, and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, and other recreational activities.

Categorically, their offerings are broken out as either hard goods or soft goods. In prior years, the weighting has been geared to the former.

FY22 Form 10K - Breakout Of Percentage Of Net Sales By Category

But this has flipped the other way through the first fiscal quarter of 2023. This is due primarily to the delayed start in the baseball and softball seasons due to unfavorable weather patterns in their operating regions.

Q1FY23 Form 10Q - Summary Of Total Net Sales By Category

At over 50% of their total footprint, California is their largest market. The overall footprint is also West Coast focused. This does create concentration risk, particularly when it comes to the weather. Droughts, wildfires, and excessive winters can all negatively impact results and can place the company at a disadvantage when stacked against their larger and more diversified peers, such as DICK's Sporting Goods (DKS).

FY22 Form 10K - Summary Of Geographic Footprint

In fact, the poor weather conditions through the first quarter were a prime factor in the company's underperformance. Weather, however, isn't entirely to blame. The demand environment is an even more pressing challenge.

At present, BGFV stock is down over 30% over the past year and is trading at the bottom end of its 52-week range. For investors, one key draw is their nearly 13% yielding dividend payout. And in my view, the stock is worth a second look for this reason alone.

Big 5 operates a simple business model that is balance sheet light. At the end of the first quarter, the company held +$27.5M in cash and carried +$315.4M in merchandise inventory.

On average, they’re turning their inventory every 160 days, which is slower than their peer set. Unlike others, the company has been hesitant to engage in aggressive promotional activity. This is largely due to their desire for margin preservation in the face of declining sales.

YCharts - Days Inventory Outstanding Of BGFV Compared To Peers

On the liability side, the company doesn't carry long-term debt, which is a notable advantage, especially in the current rate environment. They also have access to a credit facility that is currently undrawn.

At present, BGFV operates on gross margins of 33.4%. Though lower than last year, this is generally in-line with their peer set.

Seeking Alpha - Profitability Metrics Of BGFV Compared To Peers

The company also generated positive operating cash flows through the first three months of the year. This would be an improvement over 2022, where restocking efforts resulted in large headwinds in working capital. Given the more normalized inventory environment in 2023, I expect the company to be free cash flow positive for the fiscal year.

FY22 Form 10K - Partial Summary Of Cash Flow Statement

Big 5 operates in a highly competitive market and has seen demand plunge due to a combination of the inflationary environment and the reorientation of consumer spending from goods to services. In FY22, net sales were down 14%. And to start 2023, first quarter revenues were down another 7%.

Though the quarterly results were generally in-line with expectations, both transactions and average tickets were down during the quarter. In addition, their same-store sales landed closer to the lower end of their guidance range. And with the demand environment expected to remain pressured, there doesn't appear to be enough to motivate bearish investors.

The company is also prioritizing margin preservation over sales. As such, they have thus far refrained from engaging in significant promotional activity. This can be seen in their gross margins. Though they were down 210 basis points ("bps") on an overall basis, merchandise margins were down just 23bps. Additionally, margins on merchandise are still running several hundred basis points above pre-pandemic levels.

While this can be seen as a positive in some sense, the company will ultimately need to find a way to drive sales higher. And to get there, management may need to give away some margin.

New store openings are in the works. This should drive up the topline. But it could also reduce overall operating margins through greater SG&A costs.

On the date of their release, it was noted that sales were tracking lower by approximately 11% in Q2. While some catch-up was seen in their baseball-specific offerings following the rain delays in Q1, it wasn't viewed as enough to overcome the general softness seen elsewhere.

It's possible the company could have made some headway over the Memorial Day holiday. In one positive development, it was recently reported that both traffic and sales were up over the long holiday weekend. Looking ahead, the company could also see opportunities surrounding Father's Day weekend, which also falls adjacent to the Juneteenth holiday.

The Wall Street Journal ("WSJ") also recently highlighted the conducive conditions for the white water rafting season, which is expected to be among the best in years due to the recent snow melt. More specifically, the report highlighted one region in California for illustration. This is notable since California is the company's top operating market.

As is, same-store sales are expected to decrease in the high single-digit range in Q2. And EPS is expected to land in a range of negative $0.10/share to a positive $0.05/share. Both would be down significantly from results in the same period last year. If conditions, however, are ripe for recreation, as alluded to in the WSJ report, BGFV could see a surprise uplift in their Q2 results.

The current quarterly payout is $0.25/share. At current pricing of about $8/share, this represents an annualized yield of nearly 13%.

Looking ahead, the outlook for the continuity of this payout appears grim, based on Seeking Alpha's ("SA") quant ratings. One reason for the grading is that the payout is currently over 100% of their reported EPS.

Seeking Alpha - Dividend Safety Score Of BGFV

While one can point to EPS coverage as a risk, it may not be the best judge of safety. From a cash flow perspective, BGFV generated +$12.3M in operating cash flows in Q1. And they paid +$6.1M in dividends. On the surface, that's an adequate level of coverage.

The company also maintains a simple balance sheet with no long-term liabilities. Therefore, aside from the dividend, their ongoing cash requirements are principally limited to their lease obligations and capital expenditures ("CAPEX").

In 2023, total CAPEX is expected to range between +$15M and +$20M. Presuming the dividend is retained in its current form, I can see total dividend outlays for the year at about +$22.5M. This would be in-line with the total payout in 2022.

Together, then, BGFV would need +$42.5M in cash to cover the top end of their CAPEX plan and their total dividends. At present, the company has +$27.5M of cash on hand. And on a forward run-rate on quarterly cash generation of +$12.3M, I can see BGFV hauling in just under +$50M in operating cash flows for the year.

All considered, I see BGFV ending the year with about +$35M of cash on hand. From a dividend coverage perspective, then, I view the payout as safe in its current form. But that is not to say it is sacrosanct. A turn for the worse in the business could certainly flip the equation. This could be in the form of a further weakening in the demand environment. Out of an abundance of caution, management could certainly err in favor of a cut or suspension.

The primary concern surrounding Big 5 is their demand outlook. In FY22, total sales were down about 14%. And they were setback further in the first quarter of FY23 by poor weather, which essentially resulted in a missed spring sports season.

With consumers continuing to pull back, the company appears to have a tough road ahead. The hesitancy on discounting for the sake of margin preservation could also keep consumers away or result in share loss to their larger competitors, such as to DKS.

The uncertain path is perhaps the primary reason shares are lagging. All other metrics appear in-line, otherwise. Their balance sheet, for example, is free of the burden of long-term debt. And they appear to have sufficient liquidity to meet all their reoccurring commitments, including their hefty dividend payout, which currently yields nearly 13% at current pricing.

For most investors, the attractive payout, alone, is reason enough for new initiation. And on this, I’d agree. But the business itself could also surprise to the upside in the periods ahead. Positive reports surrounding holiday retail trends, as well as conducive weather patterns for outdoor recreation could work in BGFV's favor.

With shares trading on largely negative sentiment, any surprise in future reports could be met with an outsized reversal. Given the risk/reward and the possibility of a minimum 13% return from the dividend alone, I view shares as a "buy" at current pricing.

This article was written by

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