Retail sporting goods have come back in the last six months with Foot Locker (FL, Financial), Dick's Sporting Goods (DKS) and Hibbett (HIBB, Financial) all rebounding since the summer. Yet, Big 5 Sporting Goods (BGFV, Financial) continues to slide with the company’s stock down over 60% since last January, but it’s still profitable.
That’s why you should pay attention.
The company also continues to grow, albeit slowly. In the last 12 months, Big 5 booked $22 million in net profit on just over $1 billion in sales, and provided a 60-cent dividend to owners. In fact, it has also provided a steady dividend for over a decade. Yet that hasn’t been enough to make up for the $10 sell off in the last year, which is why now may be the time to get involved.
One: big dividends
Even if the profit falls in 2018, the company will likely still pay out 60 cent. That’s good for 9.84%, a solid number unless the stock is going to zero.
Two: big earnings yield
The current price-earnings (P/E) ratio is a little misleading since the company is expected to book lower earnings per share for the full year 2017, but going into 2018 the earnings yield remains in the double digits. But it’s the future of the company that matters. Investors have already seen big returns from Hibbett when just a small amount of good news mixes with an overblown sell off.
Three: big risk
Sales fell 8.7% year-over-year to $243.2 million, driven by a decline in same-store sales of 9.4%, compared to a 3.1% gain in the year-ago period. In fact, comps were down across all categories. The warm weather excuse drove the company’s comments. Climate change is becoming an increasing factor in retail inventory buying and Big 5’s winter selection is likely performing poorly.
Four: big reward
The company’s enterprise value is $175 million, which is still less than its tangible book value, and the company still generates over $1 billion in sales. Granted, Big 5’s financials are not as strong as its closest competitor Hibbett, but the company is able to survive and grow despite this challenge, and at this point all it needs to do is demonstrate the ability to stop the bleeding and book profits again. If it earns what Wall Street analysts expect a loss of 65 cents per share in 2018, with a 15 multiple, the stock will move back up to $10.
Five: small position
Long term, the company would need to make serious adjustments to its digital strategy to compete and win. Attention is the new market maker, and Amazon is capturing and holding more and more of consumers' attention with its product lineup. That’s very dangerous to all retailers.
It’s also a reason why retail should not be a big part of anyone’s portfolio. You should not be caught like Eddie Lampert with big positions in failing companies like Sears. That said, Big 5 isn’t failing. Any small business would love to be doing $1 billion in sales.
Mario Gabelli (Trades, Portfolio) holds a small position in the stock, but that is the only guru investor still involved, with Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) all selling out during the second and third quarters last year.
As always, only time will tell whether or not Big 5 Sporting Goods can get better at picking inventory, spending money on marketing, and reinventing the brand for 2018 and beyond.
Disclosure: I am not long/short any stock mentioned in this article.
