10-Q 1 bgfv-20220403.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _____________________ to ____________________

Commission file number: 000-49850

 

BIG 5 SPORTING GOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-4388794

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2525 East El Segundo Boulevard

El Segundo, California

 

90245

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (310) 536-0611

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

BGFV

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

There were 22,326,789 shares of common stock, with a par value of $0.01 per share, outstanding as of April 26, 2022.

 

 


 

BIG 5 SPORTING GOODS CORPORATION

INDEX

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets as of April 3, 2022 and January 2, 2022

3

 

Unaudited Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended April 3, 2022 and April 4, 2021

4

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen Weeks Ended April 3, 2022 and April 4, 2021

5

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended April 3, 2022 and April 4, 2021

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)

19

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4

Controls and Procedures

27

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

28

Item 1A

Risk Factors

28

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3

Defaults Upon Senior Securities

29

Item 4

Mine Safety Disclosures

29

Item 5

Other Information

29

Item 6

Exhibits

30

 

 

SIGNATURES

31

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

April 3,
2022

 

 

January 2,
2022

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

62,038

 

 

$

97,420

 

Accounts receivable, net of allowances of $60 and $62, respectively

 

 

11,709

 

 

 

13,654

 

Merchandise inventories, net

 

 

301,517

 

 

 

279,981

 

Prepaid expenses

 

 

14,125

 

 

 

16,293

 

Total current assets

 

 

389,389

 

 

 

407,348

 

Operating lease right-of-use assets, net

 

 

279,257

 

 

 

270,110

 

Property and equipment, net

 

 

58,010

 

 

 

60,401

 

Deferred income taxes

 

 

11,064

 

 

 

12,097

 

Other assets, net of accumulated amortization of $1,019 and $905, respectively

 

 

4,040

 

 

 

3,997

 

Total assets

 

$

741,760

 

 

$

753,953

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

100,304

 

 

$

104,359

 

Accrued expenses

 

 

67,444

 

 

 

85,041

 

Current portion of operating lease liabilities

 

 

76,032

 

 

 

76,882

 

Current portion of finance lease liabilities

 

 

3,431

 

 

 

3,518

 

Total current liabilities

 

 

247,211

 

 

 

269,800

 

Operating lease liabilities, less current portion

 

 

213,377

 

 

 

204,134

 

Finance lease liabilities, less current portion

 

 

5,929

 

 

 

6,456

 

Other long-term liabilities

 

 

6,342

 

 

 

6,254

 

Total liabilities

 

 

472,859

 

 

 

486,644

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, $0.01 par value, authorized 50,000,000 shares; issued 26,451,105 and
   
26,109,003 shares, respectively; outstanding 22,344,586 and 22,097,467 shares, respectively

 

 

264

 

 

 

260

 

Additional paid-in capital

 

 

124,501

 

 

 

124,909

 

Retained earnings

 

 

195,815

 

 

 

192,261

 

Less: Treasury stock, at cost; 4,106,519 and 4,011,536 shares, respectively

 

 

(51,679

)

 

 

(50,121

)

Total stockholders' equity

 

 

268,901

 

 

 

267,309

 

Total liabilities and stockholders' equity

 

$

741,760

 

 

$

753,953

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

- 3 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

13 Weeks Ended

 

 

 

April 3,
2022

 

 

April 4,
2021

 

Net sales

 

$

241,981

 

 

$

272,806

 

Cost of sales

 

 

156,048

 

 

 

174,913

 

Gross profit

 

 

85,933

 

 

 

97,893

 

Selling and administrative expense

 

 

75,317

 

 

 

70,144

 

Operating income

 

 

10,616

 

 

 

27,749

 

Interest expense

 

 

184

 

 

 

342

 

Income before income taxes

 

 

10,432

 

 

 

27,407

 

Income tax expense

 

 

1,329

 

 

 

5,861

 

Net income

 

$

9,103

 

 

$

21,546

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.42

 

 

$

1.01

 

Diluted

 

$

0.41

 

 

$

0.96

 

Weighted-average shares of common stock
   outstanding:

 

 

 

 

 

 

Basic

 

 

21,680

 

 

 

21,417

 

Diluted

 

 

22,300

 

 

 

22,371

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

- 4 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

 

 

 

13 Weeks Ended April 3, 2022

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Treasury

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of January 2, 2022

 

 

22,097,467

 

 

$

260

 

 

$

124,909

 

 

$

192,261

 

 

$

(50,121

)

 

$

267,309

 

Net income

 

 

 

 

 

 

 

 

 

 

 

9,103

 

 

 

 

 

 

9,103

 

Dividends on common stock ($0.25 per share)

 

 

 

 

 

 

 

 

 

 

 

(5,549

)

 

 

 

 

 

(5,549

)

Issuance of nonvested share awards

 

 

236,560

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Conversion of vested share unit awards

 

 

124,012

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Exercise of share option awards

 

 

61,575

 

 

 

1

 

 

 

244

 

 

 

 

 

 

 

 

 

245

 

Share-based compensation

 

 

 

 

 

 

 

 

563

 

 

 

 

 

 

 

 

 

563

 

Forfeiture of nonvested share awards

 

 

(2,705

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment of
  withholding tax

 

 

(77,340

)

 

 

 

 

 

(1,212

)

 

 

 

 

 

 

 

 

(1,212

)

Purchases of treasury stock

 

 

(94,983

)

 

 

 

 

 

 

 

 

 

 

 

(1,558

)

 

 

(1,558

)

Balance as of April 3, 2022

 

 

22,344,586

 

 

$

264

 

 

$

124,501

 

 

$

195,815

 

 

$

(51,679

)

 

$

268,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended April 4, 2021

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Treasury

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of January 3, 2021

 

 

21,930,328

 

 

$

255

 

 

$

121,837

 

 

$

153,073

 

 

$

(42,527

)

 

$

232,638

 

Net income

 

 

 

 

 

 

 

 

 

 

 

21,546

 

 

 

 

 

 

21,546

 

Dividends on common stock ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

(3,339

)

 

 

 

 

 

(3,339

)

Issuance of nonvested share awards

 

 

235,480

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Exercise of share option awards

 

 

196,200

 

 

 

2

 

 

 

974

 

 

 

 

 

 

 

 

 

976

 

Share-based compensation

 

 

 

 

 

 

 

 

425

 

 

 

 

 

 

 

 

 

425

 

Forfeiture of nonvested share awards

 

 

(3,520

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment of
  withholding tax

 

 

(70,228

)

 

 

 

 

 

(1,046

)

 

 

 

 

 

 

 

 

(1,046

)

Balance as of April 4, 2021

 

 

22,288,260

 

 

$

259

 

 

$

122,188

 

 

$

171,280

 

 

$

(42,527

)

 

$

251,200

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

- 5 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

13 Weeks Ended

 

 

 

April 3,
2022

 

 

April 4,
2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

9,103

 

 

$

21,546

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

    (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

4,410

 

 

 

4,259

 

Share-based compensation

 

 

563

 

 

 

425

 

Amortization of other assets

 

 

114

 

 

 

265

 

Loss on disposal of equipment

 

 

288

 

 

 

 

Noncash lease expense

 

 

16,820

 

 

 

16,033

 

Proceeds from insurance recovery - lost profit margin and expenses

 

 

 

 

 

1,083

 

Gain on recovery of insurance proceeds - lost profit margin and expenses

 

 

 

 

 

(460

)

Gain on recovery of insurance proceeds - property and equipment

 

 

 

 

 

(249

)

Deferred income taxes

 

 

1,033

 

 

 

1,299

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

1,989

 

 

 

7,885

 

Merchandise inventories, net

 

 

(21,536

)

 

 

3,893

 

Prepaid expenses and other assets

 

 

2,011

 

 

 

927

 

Accounts payable

 

 

(3,891

)

 

 

7,683

 

Operating lease liabilities

 

 

(17,618

)

 

 

(16,828

)

Accrued expenses and other long-term liabilities

 

 

(17,003

)

 

 

(5,787

)

Net cash (used in) provided by operating activities

 

 

(23,717

)

 

 

41,974

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,939

)

 

 

(1,742

)

Proceeds from insurance recovery - property and equipment

 

 

 

 

 

249

 

Proceeds from disposal of property and equipment

 

 

13

 

 

 

 

Net cash used in investing activities

 

 

(2,926

)

 

 

(1,493

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Changes in book overdraft

 

 

534

 

 

 

68

 

Debt issuance costs paid

 

 

 

 

 

(717

)

Principal payments under finance lease liabilities

 

 

(815

)

 

 

(931

)

Proceeds from exercise of share option awards

 

 

245

 

 

 

948

 

Cash purchases of treasury stock

 

 

(1,389

)

 

 

 

Tax withholding payments for share-based compensation

 

 

(1,212

)

 

 

(1,046

)

Dividends paid

 

 

(6,102

)

 

 

(3,360

)

Net cash used in financing activities

 

 

(8,739

)

 

 

(5,038

)

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(35,382

)

 

 

35,443

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

97,420

 

 

 

64,654

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

62,038

 

 

$

100,097

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 Property and equipment acquired under finance leases

 

$

201

 

 

$

3,334

 

 Property and equipment additions unpaid

 

$

1,570

 

 

$

1,316

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 Interest paid

 

$

148

 

 

$

192

 

 Income taxes paid

 

$

7

 

 

$

6

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

- 6 -


 

BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)
Description of Business

Big 5 Sporting Goods Corporation (the “Company”) is a leading sporting goods retailer in the western United States, operating 431 stores and an e-commerce platform as of April 3, 2022. The Company provides a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. The Company’s product mix includes athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, home recreation, tennis, golf and winter and summer recreation. The Company is a holding company that operates as one reportable segment through Big 5 Corp., its 100%-owned subsidiary, and Big 5 Services Corp., which is a 100%-owned subsidiary of Big 5 Corp. Big 5 Services Corp. provides a centralized operation for the issuance and administration of gift cards and returned merchandise credits (collectively, “stored-value cards”).

The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its 100%-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended January 2, 2022 included in the Company’s Annual Report on Form 10-K. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented.

The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

(2)
Summary of Significant Accounting Policies

Consolidation

The accompanying Interim Financial Statements include the accounts of Big 5 Sporting Goods Corporation, Big 5 Corp. and Big 5 Services Corp. Intercompany balances and transactions have been eliminated in consolidation.

Reporting Period

The Company follows the concept of a 52-53 week fiscal year, which ends on the Sunday nearest December 31. Fiscal year 2022 is comprised of 52 weeks and ends on January 1, 2023. Fiscal year 2021 was comprised of 52 weeks and ended on January 2, 2022. The interim periods in fiscal 2022 and 2021 are each comprised of 13 weeks.

Recently Issued Accounting Updates

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this standard are elective and are effective upon issuance for all entities, and the impact from this standard is expected to be immaterial.

Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.

- 7 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

COVID-19 Impact on Concentration of Risk

In recent years, the novel coronavirus (“COVID-19”) pandemic has significantly impacted health and economic conditions throughout the United States and globally, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine. At the start of the COVID-19 pandemic in fiscal 2020, the Company was forced to temporarily close more than half of its retail store locations and was subsequently able to gradually reopen these stores. In the first quarter of fiscal 2021, the Company experienced a limited number of temporary store closures throughout the chain resulting from COVID-19 outbreaks. As the pandemic continues to evolve, the Company may be further required to restrict the operations of its stores or distribution center if it is deemed necessary or if recommended or mandated by authorities.

A substantial amount of the Company’s inventory is manufactured abroad. COVID-19 has also impacted the Company’s supply chain for products sold, particularly those products that are sourced from Asia. To the extent one or more vendors is negatively impacted by continued supply chain disruptions or by COVID-19, including due to interruptions at or closure of those vendors’ distribution centers or manufacturing facilities, or the Company or its vendors are unable to obtain the necessary shipping capacity to transport products to the Company’s distribution center, the Company may be unable to maintain delivery schedules or adequate inventory in its stores. During the second half of fiscal 2021, and continuing into the first quarter of fiscal 2022, the Company experienced significant shipping delays of products sourced from overseas vendors to be received at the Ports of Los Angeles and Long Beach, which reflected increased shipping volume and insufficient labor resources at the ports that have significantly increased cargo backlogs. These factors, in addition to workforce shortages in the trucking industry, have limited the Company’s ability to obtain desired quantities of inventory for various merchandise categories. While the Company has generally been able to sufficiently stock product in its stores to meet most consumer demand during the pandemic, future prolonged and sustained delays in product reaching the Company’s stores from overseas vendors, particularly during the holiday season, could result in the inability to obtain adequate levels of merchandise inventories to meet consumers’ needs, which could have an adverse impact on net sales and profitability.

General Concentration of Risk

The Company purchases merchandise from over 700 suppliers, and the Company’s 20 largest suppliers accounted for 36.8% of total purchases in fiscal 2021. One vendor, Nike, represented greater than 5% of total purchases, at 7.6%, in fiscal 2021 and accounted for 8.7% of the Company’s total sales in fiscal 2021. In early fiscal 2021, the Company was informed of an expansion of Nike’s direct-to-consumer initiatives that impacted certain multi-branded retailers, including the Company. This has led to a significant reduction in the Company’s supply chain relative to this vendor. Although the Company is no longer purchasing products directly from Nike, the Company expects to continue to purchase certain Nike branded products from authorized licensees. This transition did not have a material impact on the Company’s sales in fiscal 2021 or the first quarter of fiscal 2022. The Company has been actively expanding its relationships with other new and existing vendors in an effort to replace the affected Nike product within its product mix.

A substantial amount of the Company’s inventory is manufactured abroad, and shipping ports may experience capacity constraints (such as delays associated with COVID-19), labor strikes, work stoppages or other disruptions that may delay the delivery of imported products. A contract dispute may lead to protracted delays in the movement of the Company’s products, which could further delay the delivery of products to the Company’s stores and impact net sales and profitability. In addition, other conditions outside of the Company’s control, such as adverse weather conditions or acts of terrorism or war, such as the current conflict in Ukraine, could significantly disrupt operations at shipping ports or otherwise impact transportation of the imported merchandise we sell, either through supply chain disruptions or rising fuel costs.

Use of Estimates

Management makes a number of estimates and assumptions relating to the reporting of assets, liabilities and stockholders’ equity and the disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and reported amounts of revenue and expense during the reporting period to prepare these Interim Financial Statements in conformity with GAAP. Certain items subject to such estimates and assumptions include the carrying amount of merchandise inventories, property and equipment, lease assets and lease liabilities; valuation allowances for receivables, sales returns and deferred income tax assets; estimates related to stored-value cards and the valuation of share-based compensation awards; and obligations related to litigation, self-insurance liabilities and employee benefits. Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after April 3, 2022, including those resulting from the impacts of future COVID-19 variant outbreaks, may result in actual outcomes that differ from those contemplated by management’s assumptions and estimates.

 

- 8 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Revenue Recognition

The Company operates solely as a sporting goods retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products in the western United States and online. Generally, all revenue is recognized when control of the promised goods is transferred to customers, for an amount that reflects the consideration in exchange for those goods. Accordingly, the Company implicitly enters into a contract with customers to deliver merchandise inventory at the point of sale. Collectability is probable since the Company only extends immaterial credit purchases to certain municipalities and local school districts.

In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company disaggregates net sales into the following major merchandise categories to depict the nature and amount of revenue and related cash flows:

 

 

 

13 Weeks Ended

 

 

 

April 3,
2022

 

 

April 4,
2021

 

 

 

(In thousands)

 

Hardgoods

 

$

120,964

 

 

$

140,906

 

Athletic and sport footwear

 

 

62,766

 

 

 

66,673

 

Athletic and sport apparel

 

 

56,574

 

 

 

63,526

 

Other sales

 

 

1,677

 

 

 

1,701

 

Net sales

 

$

241,981

 

 

$

272,806

 

 

Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:

Retail store sales
E-commerce sales
Stored-value cards

For performance obligations related to retail store and e-commerce sales contracts, the Company typically transfers control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the product is tendered for delivery to the common carrier. For performance obligations related to stored-value cards, the Company typically transfers control upon redemption of the stored-value card through consummation of a future sales transaction. The Company accounts for shipping and handling relative to e-commerce sales as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only one performance obligation, the sale of the product, at shipping point (when the customer gains control). Revenue associated with e-commerce sales was not material for the 13 weeks ended April 3, 2022 and April 4, 2021.

The Company recognized $1.8 million and $1.7 million in stored-value card redemption revenue for the 13 weeks ended April 3, 2022 and April 4, 2021, respectively. The Company also recognized $0.1 million in stored-value card breakage revenue for the 13 weeks ended April 3, 2022 and April 4, 2021. The Company had outstanding stored-value card liabilities of $7.8 million and $8.3 million as of April 3, 2022 and January 2, 2022, respectively, which are included in accrued expenses in the accompanying interim unaudited condensed consolidated balance sheets. Based upon historical experience, stored-value cards are predominantly redeemed in the first two years following their issuance date.

In the accompanying interim unaudited condensed consolidated balance sheets, the Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $0.8 million and $1.2 million related to estimated sales returns as of April 3, 2022 and January 2, 2022, respectively, and recorded, in accrued expenses, an allowance for sales returns reserve of $1.7 million and $2.5 million as of April 3, 2022 and January 2, 2022, respectively.

Share-Based Compensation

The Company accounts for its share-based compensation in accordance with ASC 718, Compensation—Stock Compensation. The Company recognizes compensation expense on a straight-line basis over the requisite service period using the fair-value method for share option awards, nonvested share awards and nonvested share unit awards granted with service-only conditions. See Note 10 to the Interim Financial Statements for a further discussion on share-based compensation.

 

- 9 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and highly liquid investments of excess cash into U.S. Treasury bills, which have maturities of 90 days or less. See Note 3 to the Interim Financial Statements for a further discussion on the fair value of U.S. Treasury bills. Book overdrafts are classified as current liabilities in the Company’s interim unaudited condensed consolidated balance sheets.

Valuation of Merchandise Inventories, Net

The Company’s merchandise inventories are made up of finished goods and are valued at the lower of cost or net realizable value using the weighted-average cost method that approximates the first-in, first-out (“FIFO”) method. Average cost includes the direct purchase price of merchandise inventory, net of vendor allowances and cash discounts, in-bound freight-related expense and allocated overhead expense associated with the Company’s distribution center.

Management regularly reviews inventories and records valuation reserves for damaged and defective merchandise, merchandise items with slow-moving or obsolescence exposure and merchandise that has a carrying value that exceeds net realizable value. Because of its merchandise mix, the Company has not historically experienced significant occurrences of obsolescence.

Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends. The Company performs physical inventories of its stores at least once per year and cycle counts inventories at its distribution center throughout the year. The reserve for inventory shrinkage primarily represents an estimate for inventory shrinkage for each store since the last physical inventory date through the reporting date.

These reserves are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from expectations.

Valuation of Long-Lived Assets

In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows (“asset group”), usually at the store level. The carrying amount of a store asset group includes stores’ property and equipment, primarily leasehold improvements, and operating lease right-of-use (“ROU”) assets. The carrying amount of a store asset group is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the store asset group. Factors that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating and cash flow losses, and a projection that demonstrates continuing losses or insufficient income over the remaining reasonably certain lease term associated with the use of a store asset group. Other factors may include an adverse change in the business climate or an adverse action or assessment by a regulator in the market of a store asset group. When stores are identified as having an indicator of impairment, the Company forecasts undiscounted cash flows over the store asset group’s remaining reasonably certain lease term and compares the undiscounted cash flows to the carrying amount of the store asset group. If the store asset group is determined not to be recoverable, then an impairment charge will be recognized in the amount by which the carrying amount of the store asset group exceeds its fair value, determined using discounted cash flow valuation techniques, as contemplated in ASC 820, Fair Value Measurements.

The Company determines the cash flows expected to result from the store asset group by projecting future revenue, gross margin and operating expense for each store asset group under evaluation for impairment. The estimates of future cash flows involve management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning, and include assumptions about sales growth rates, gross margins and operating expense in relation to the current economic environment and the Company’s future expectations, competitive factors in its various markets, inflation, sales trends and other relevant environmental factors that may impact the store under evaluation. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions. If economic conditions deteriorate in the markets in which the Company conducts business, or if other negative market conditions develop, the Company may experience additional impairment charges in the future for underperforming stores.

 

- 10 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The resulting impairment charge, if any, is allocated to the property and equipment, primarily leasehold improvements, and operating lease ROU assets on a pro rata basis using the relative carrying amounts of those assets. The allocated impairment charge to a long-lived asset is limited to the extent that the impairment charge does not reduce the carrying amount of the long-lived asset below its individual fair value. The estimation of the fair value of an ROU asset involves the evaluation of current market value rental amounts for leases associated with ROU assets. The estimates of current market value rental amounts are primarily based on recent observable market rental data of other comparable retail store locations. The fair value of an ROU asset is measured using a discounted cash flow valuation technique by discounting the estimated current and future market rental values using a property-specific discount rate.

The Company did not recognize any impairment charges in the first quarter of fiscal 2022 or 2021.

Leases

In accordance with ASC 842, Leases, the Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware, and distribution center delivery tractors and equipment. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the interim unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment and finance lease liabilities, current and noncurrent, on the interim unaudited condensed consolidated balance sheets. Lease liabilities are calculated using the effective interest method, regardless of classification, while the amortization of ROU assets varies depending upon classification. Finance lease classification results in a front-loaded expense recognition pattern over the lease term which amortizes the ROU asset by recognizing interest expense and amortization expense as separate components of lease expense and calculates the amortization expense component on a straight-line basis. Conversely, operating lease classification results in a straight-line expense recognition pattern over the lease term and recognizes lease expense as a single expense component, which results in amortization of the ROU asset that equals the difference between lease expense and interest expense. Lease expense for finance and operating leases are included in cost of sales or selling and administrative expense, based on the use of the leased asset, on the interim unaudited condensed consolidated statements of operations. Variable payments such as property taxes, insurance and common area maintenance related to triple net leases, as well as certain equipment sales taxes, licenses, fees and repairs, are expensed as incurred, and leases with an initial term of 12 months or less are excluded from minimum lease payments and are not recorded on the interim unaudited condensed consolidated balance sheets. The Company recognizes variable lease expense for these short-term leases on a straight-line basis over the remaining lease term.

ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate (“IBR”) to determine the present value of lease payments. The collateralized IBR is based on a synthetic credit rating that is externally prepared on an annual basis. This analysis considers qualitative and quantitative factors based on guidance provided by a rating agency for the consumer durables industry. The Company adjusts the selected IBR quarterly with a company-specific unsecured yield curve that approximates the Company’s market risk profile. The collateralized IBR is also based upon the estimated impact that the collateral has on the IBR. To account for the collateralized nature of the IBR, the Company utilized a notching method based on notching guidance provided by a rating agency whereby the Company’s base credit rating is notched upward as the yield curve on a secured loan is expected to be lower versus an unsecured loan.

The operating lease ROU asset also includes any prepaid lease payments made and is reduced by lease incentives such as tenant improvement allowances. The operating lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.

Certain of the leases for the Company’s retail store facilities provide for payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease. Under ASC 842, these contingent rents are expensed as they accrue.

See Note 5 to the Interim Financial Statements for a further discussion on leases.

 

 

 

- 11 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

(3)
Fair Value Measurements

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate the fair values of these instruments due to their short-term nature. Cash equivalents consist of highly liquid investments of excess cash into U.S. Treasury bills, which have maturities of 90 days or less. As of April 3, 2022 and January 2, 2022, the Company recorded $50.0 million and $75.0 million, respectively, in cash equivalents, and classified these assets as Level 1 inputs, which are quoted prices (unadjusted) in active markets for identical assets that the Company can access at the measurement date. The Company records these cash equivalents monthly, based on the prevailing market interest rate as of the measurement date. Book overdrafts for checks outstanding are classified as current liabilities in the Company’s interim unaudited condensed consolidated balance sheets. The carrying amount for borrowings, if any, under the Company’s credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. When the Company recognizes impairment on certain of its underperforming stores, the carrying values of these stores are reduced to their estimated fair values.

The Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were assets subject to long-lived asset impairment related to certain underperforming stores. The Company estimates the fair values of these long-lived assets based on the Company’s own judgments about the assumptions that market participants would use in pricing the asset and on observable real estate market data of underperforming stores’ specific comparable markets, when available. The Company classifies these fair value measurements as Level 3 inputs, which are unobservable inputs for which market data are not available and that are developed using the best information available about pricing assumptions used by market participants in accordance with ASC 820. As of April 3, 2022 and January 2, 2022, there were no long-lived assets subject to impairment.

(4)
Accrued Expenses

The major components of accrued expenses are as follows:

 

 

 

April 3,
2022

 

 

January 2,
2022

 

 

 

(In thousands)

 

Payroll and related expense

 

$

27,241

 

 

$

37,345

 

Occupancy expense

 

 

10,235

 

 

 

10,168

 

Sales tax

 

 

8,681

 

 

 

12,112

 

Other

 

 

21,287

 

 

 

25,416

 

Accrued expenses

 

$

67,444

 

 

$

85,041

 

 

Payroll and related expense as of April 3, 2022 and January 2, 2022 reflected a deferral of the employer portion of Social Security tax provided by the U.S. Coronavirus Aid, Relief and Economic Security (“CARES”) Act, which allowed employers to defer their portion of the social security payroll tax otherwise due with respect to wages earned from March 27, 2020 through December 31, 2020.

(5)
Lease Commitments

The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware, and distribution center delivery tractors and equipment, and accounts for these leases in accordance with ASC 842.

Certain of the leases for the Company’s retail store facilities provide for variable payments for property taxes, insurance, common area maintenance payments related to triple net leases, rental payments based on future sales volumes at the leased location, as well as certain equipment sales taxes, licenses, fees and repairs, which are not measurable at the inception of the lease, or rental payments that are adjusted periodically for inflation. The Company recognizes variable lease expense for these leases in the period incurred which, for contingent rent, begins in the period in which it becomes probable that the specified target that triggers the variable lease payments will be achieved. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

- 12 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

In accordance with ASC 842, the components of lease expense were as follows:

 

 

 

13 Weeks Ended

 

 

 

April 3,
2022

 

 

April 4,
2021

 

 

 

(In thousands)

 

Lease expense:

 

 

 

 

 

 

Operating lease expense

 

$

20,561

 

 

$

20,336

 

Variable lease expense

 

 

4,624

 

 

 

4,492

 

Sublease income

 

 

 

 

 

(78

)

Operating lease expense

 

 

25,185

 

 

 

24,750

 

Amortization of right-of-use assets

 

 

902

 

 

 

649

 

Interest on lease liabilities

 

 

73

 

 

 

59

 

Finance lease expense

 

 

975

 

 

 

708