|
Published: May 14, 2010
It's not just the birds chirping and the
flowers blooming. Even humans are getting in on the spring
action; gearing up for softball leagues, mountain hikes and lazy
days of fishing. This eternal ritual brings hordes of shoppers
to sporting goods stores to check out the latest gear. That
helps explain why the parking lots are busy at Big Five
Sporting Goods (Nasdaq: BGFV).
Big Five is one of several large publicly-traded sports
retailers, along with Dick's Sporting Goods (NYSE: DKS)
and Hibbett Sports (Nasdaq: HIBB). But Big Five may have
hit on the best approach of the bunch, which should allow ample
room for expansion.
Right now, most of the retailer's 384 stores are in the Western
United States, half of them in California. The store base grows
by about 20 a year. Unlike other sporting goods retailers which
re-sell shoes and gear from the brand name manufacturers, Big
Five relies more heavily on exclusive products, many of which
carry the retailer's brand name. In addition, the company's
buyers are always on the lookout for closeout specials, which
can yield rock-bottom prices for customers.
This entire approach enables Big Five to be seen as a
value-oriented store, so the company maintains very high profit
margins. Big Five's gross margins typically fall in the 34% to
35% range -- roughly 500 basis points higher than the rivals'
profit margins. And as management keeps a tight lid on
store-level expenses, the company generates impressive
store-level economics. Stores generate an
EBITDA return on invested capital of about 40% in a store's
first year, 45% in the second year and nearly 50% in the third
year and beyond.
A maturing base of stores has enabled Big Five to steadily
expand its footprint by about +5% a year. The rising base of
stores yields even greater purchasing power for the company's
buyers, which can strike even better deals on closeout sales and
private label goods.
The formula worked like a charm -- until
the recession hit. Profits slumped badly in 2008, and only
partially rebounded in 2009. Prior to the slowdown, Big Five
typically earned $1.25 to $1.50 a share each year. As consumers
slowly emerge from their shell, profits are likely to stay below
the low end of that range this year, but could bounce back
toward the $1.40 mark in 2011.
Based on current expansion plans, Big Five is likely to have
about 440 stores by the end of 2012. Simply applying historical
profit margins on that expanded store base, while allowing for a
moderate expansion in corporate
overhead, should push 2012
EPS toward the $1.65 mark. This isn't scorching profit
growth, but investors are likely to reward Big Five for its slow
and steady growth approach.
In its most recent quarter, Big Five noted that stores open more
than a year posted a +2.4% jump in same store sales. That's
nothing special, but it's all that's really needed for Big Five
to pound out its tried-and-true growth formula.
Shares have posted solid gains during the past year and have
recently risen to $16, but they have historically traded in the
$20 to $30 range prior to the economic downturn. As long as the
economy maintains a slow and steady course, shares are likely to
work their way back to that range. To get to $25, the midpoint
of that range, shares would need to trade for about 18 times
2011 profits, right in-line with the earnings growth rate.
-- David Sterman
Contributor
StreetAuthority |
