UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from _____________________ to ____________________
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code: ( |
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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.
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).
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 |
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Non-accelerated filer |
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Smaller reporting company |
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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
BIG 5 SPORTING GOODS CORPORATION
INDEX
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Page |
PART I – FINANCIAL INFORMATION |
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Item 1 |
3 |
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Unaudited Condensed Consolidated Balance Sheets as of October 1, 2023 and January 1, 2023 |
3 |
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4 |
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5 |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
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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 |
28 |
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Item 4 |
28 |
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PART II – OTHER INFORMATION |
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Item 1 |
29 |
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Item 1A |
29 |
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Item 2 |
29 |
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Item 3 |
29 |
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Item 4 |
29 |
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Item 5 |
29 |
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Item 6 |
30 |
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31 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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October 1, |
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January 1, |
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ASSETS |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable, net of allowances of $ |
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Merchandise inventories, net |
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Prepaid expenses |
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Total current assets |
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Operating lease right-of-use assets, net |
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Property and equipment, net |
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Deferred income taxes |
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Other assets, net of accumulated amortization of $ |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Current portion of operating lease liabilities |
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Current portion of finance lease liabilities |
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Total current liabilities |
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Operating lease liabilities, less current portion |
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Finance lease liabilities, less current portion |
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Other long-term liabilities |
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Total liabilities |
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Stockholders' equity: |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Less: Treasury stock, at cost; |
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( |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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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)
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13 Weeks Ended |
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39 Weeks Ended |
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October 1, |
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October 2, |
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October 1, |
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October 2, |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling and administrative expense |
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Operating income |
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Interest (income) expense |
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( |
) |
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( |
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Income before income taxes |
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Income tax expense |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average shares of common stock |
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Basic |
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Diluted |
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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)
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13 Weeks Ended October 1, 2023 |
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Additional |
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Treasury |
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Common Stock |
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Paid-In |
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Retained |
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Stock, |
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Shares |
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Amount |
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Capital |
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Earnings |
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At Cost |
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Total |
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Balance as of July 2, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends on common stock ($ |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Exercise of share option awards |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Forfeiture of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Balance as of October 1, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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13 Weeks Ended October 2, 2022 |
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Additional |
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Treasury |
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Common Stock |
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Paid-In |
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Retained |
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Stock, |
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Shares |
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Amount |
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Capital |
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Earnings |
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At Cost |
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Total |
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Balance as of July 3, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends on common stock ($ |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Exercise of share option awards |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Forfeiture of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Purchases of treasury stock |
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( |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance as of October 2, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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39 Weeks Ended October 1, 2023 |
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Additional |
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Treasury |
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Common Stock |
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Paid-In |
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Retained |
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Stock, |
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Shares |
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Amount |
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Capital |
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Earnings |
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At Cost |
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Total |
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Balance as of January 1, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends on common stock ($ |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Issuance of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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Exercise of share option awards |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Forfeiture of nonvested share awards |
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( |
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— |
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— |
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— |
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— |
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— |
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Retirement of common stock for payment |
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( |
) |
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( |
) |
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( |
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— |
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— |
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( |
) |
Balance as of October 1, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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39 Weeks Ended October 2, 2022 |
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Additional |
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Treasury |
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Common Stock |
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Paid-In |
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Retained |
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Stock, |
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Shares |
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Amount |
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Capital |
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Earnings |
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At Cost |
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Total |
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Balance as of January 2, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends on common stock ($ |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Issuance of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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Conversion of vested share unit awards |
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( |
) |
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— |
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— |
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— |
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Exercise of share option awards |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Forfeiture of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Retirement of common stock for payment |
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( |
) |
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— |
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( |
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— |
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— |
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( |
) |
Purchases of treasury stock |
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( |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance as of October 2, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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See accompanying notes to unaudited condensed consolidated financial statements.
- 5 -
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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39 Weeks Ended |
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October 1, |
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October 2, |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash |
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provided by (used in) operating activities: |
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Depreciation and amortization |
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Share-based compensation |
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Amortization of other assets |
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Loss on disposal of equipment |
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— |
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Noncash lease expense |
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Proceeds from insurance recovery - lost profit margin and expenses |
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— |
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Gain on recovery of insurance proceeds - lost profit margin and expenses |
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( |
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— |
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Gain on recovery of insurance proceeds - property and equipment |
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( |
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— |
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Deferred income taxes |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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Merchandise inventories, net |
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( |
) |
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Prepaid expenses and other assets |
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( |
) |
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( |
) |
Accounts payable |
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( |
) |
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( |
) |
Operating lease liabilities |
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( |
) |
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( |
) |
Accrued expenses and other long-term liabilities |
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( |
) |
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( |
) |
Net cash provided by (used in) operating activities |
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( |
) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
) |
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( |
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Proceeds from insurance recovery - property and equipment |
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— |
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Proceeds from disposal of property and equipment |
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— |
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Net cash used in investing activities |
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( |
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( |
) |
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Cash flows from financing activities: |
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Changes in book overdraft |
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( |
) |
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Principal payments under finance lease liabilities |
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( |
) |
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( |
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Proceeds from exercise of share option awards |
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Cash purchases of treasury stock |
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— |
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( |
) |
Tax withholding payments for share-based compensation |
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( |
) |
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( |
) |
Dividends paid |
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( |
) |
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( |
) |
Net cash used in financing activities |
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( |
) |
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( |
) |
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Net decrease in cash and cash equivalents |
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( |
) |
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( |
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|
||
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Property and equipment acquired under finance leases |
|
$ |
|
|
$ |
|
||
Property and equipment additions unpaid |
|
$ |
|
|
$ |
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
Income taxes paid |
|
$ |
|
|
$ |
|
||
See accompanying notes to unaudited condensed consolidated financial statements.
- 6 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Big 5 Sporting Goods Corporation (the “Company”) is a leading sporting goods retailer in the western United States, operating
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 1, 2023 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.
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
Recently Issued Accounting Updates
In May 2023, the Securities and Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 34-97424, Share Repurchase Disclosure Modernization, requiring disclosures related to issuers’ share repurchases that will provide investors with enhanced information to assess the purposes and effects of the repurchases. Disclosure requirements under this rule will be effective in the fourth quarter of fiscal 2023. We do not expect the adoption of this final rule to have a material impact on our results of operations, liquidity or capital resources.
In June 2023, the SEC approved new listing standards that were proposed by the New York Stock Exchange and Nasdaq. The new listing standards require listed companies to adopt and comply with a written policy providing for the recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is based on erroneously reported financial information. The listing standards took effect on October 2, 2023 and registrants will have until December 1, 2023 (60 days after the effective date) to adopt a recovery policy. The recovery policy must, however, apply to erroneously awarded incentive-based compensation received (as defined in the listing standards) after the effective date. We do not expect the adoption of these new listing standards to have a material impact on our results of operations, liquidity or capital resources.
- 7 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In July 2023, the SEC adopted the final rule under SEC Release Nos. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, requiring current disclosure about material cybersecurity incidents; periodic disclosures about a registrant’s processes to assess, identify, and manage material cybersecurity risks; a description of management’s role in assessing and managing material cybersecurity risks; and the board of directors’ oversight of cybersecurity risks. While the incident-reporting requirements under this rule will be effective in the second quarter of fiscal 2024 due to the Company’s status as a smaller-reporting company, the disclosure requirements under this rule will be effective in the fourth quarter of fiscal 2023. We do not expect the adoption of this final rule to have a material impact on our results of operations, liquidity or capital resources.
Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.
General Concentration of Risk
The Company purchases merchandise from nearly
A substantial amount of the Company’s inventory is manufactured abroad and, from time to time, shipping ports may experience capacity constraints (such as delays associated with the novel coronavirus “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 freight and 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 October 1, 2023 may result in actual outcomes that differ from those contemplated by management’s assumptions and estimates.
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 |
|
|
39 Weeks Ended |
|
||||||||||
|
|
October 1, |
|
|
October 2, |
|
|
October 1, |
|
|
October 2, |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Hardgoods |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Athletic and sport footwear |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Athletic and sport apparel |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
- 8 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:
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
The Company recognized $
In the accompanying interim unaudited condensed consolidated balance sheets, the Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $
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.
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 original maturities of three months 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 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.
- 9 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
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
- 10 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 (“IT”) systems 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)
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 original maturities of three months or less. As of October 1, 2023 and January 1, 2023, the Company had
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 October 1, 2023 and January 1, 2023, there were
The major components of accrued expenses are as follows:
|
|
October 1, |
|
|
January 1, |
|
||
|
|
(In thousands) |
|
|||||
Payroll and related expense |
|
$ |
|
|
$ |
|
||
Occupancy expense |
|
|
|
|
|
|
||
Sales tax |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Accrued expenses |
|
$ |
|
|
$ |
|
||
The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, IT systems 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)
The components of lease expense were as follows:
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
|
October 1, |
|
|
October 2, |
|
|
October 1, |
|
|
October 2, |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Lease expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating lease expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Finance lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total lease expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other information related to leases was as follows:
|
|
39 Weeks Ended |
|
|||||
|
|
October 1, |
|
|
October 2, |
|
||
|
|
(In thousands) |
|
|||||
Operating cash flows from operating leases |
|
$ |
|
|
$ |
|
||
Financing cash flows from finance leases |
|
|
|
|
|
|
||
Operating cash flows from finance leases |
|
|
|
|
|
|
||
Cash paid for amounts included in the measurement of lease liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Right-of-use assets obtained in exchange for new finance lease liabilities |
|
$ |
|
|
$ |
|
||
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
$ |
|
|
$ |
|
||
Weighted-average remaining lease term—finance leases |
|
|
|
|
||||
Weighted-average remaining lease term—operating leases |
|
|
|
|
||||
Weighted-average discount rate—finance leases |
|
|
% |
|
|
% |
||
Weighted-average discount rate—operating leases |
|
|
% |
|
|
% |
||
Maturities of finance and operating lease liabilities as of October 1, 2023 were as follows:
Fiscal Year Ending: |
|
Finance |
|
|
Operating |
|
||
|
|
(In thousands) |
|
|||||
2023 (remaining three months) |
|
$ |
|
|
$ |
|
||
2024 |
|
|
|
|
|
|
||
2025 |
|
|
|
|
|
|
||
2026 |
|
|
|
|
|
|
||
2027 |
|
|
|
|
|
|
||
Thereafter |
|
|
|
|
|
|
||
Undiscounted cash flows |
|
$ |
|
|
$ |
|
||
Reconciliation of lease liabilities: |
|
|
|
|
|
|
||
Weighted-average remaining lease term |
|
|
|
|
||||
Weighted-average discount rate |
|
|
% |
|
|
% |
||
Present values |
|
$ |
|
|
$ |
|
||
Lease liabilities - current |
|
|
|
|
|
|
||
Lease liabilities - long-term |
|
|
|
|
|
|
||
Lease liabilities - total |
|
$ |
|
|
$ |
|
||
Difference between undiscounted and discounted cash flows |
|
$ |
|
|
$ |
|
||
- 13 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company may borrow under the Loan Agreement from time to time, provided the amounts outstanding will not exceed the lesser of the then aggregate committed availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Line Cap”). As defined in the Loan Agreement, the “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a)
Generally, the Company may designate specific borrowings under the Loan Agreement as either base rate loans or Term SOFR rate loans. The applicable interest rate on the Company’s borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Line Cap over amounts borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as Term SOFR rate loans bear interest at a rate equal to the then applicable secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) rate plus a
Level |
|
Average Daily Availability |
|
SOFR Rate |
|
Base Rate |
I |
|
|
|
|||
II |
|
|
|
The commitment fee assessed on the unused portion of the credit facility is
As of October 1, 2023 and January 1, 2023, the Company had
- 14 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Under the asset and liability method prescribed under ASC 740, Income Taxes, the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The realizability of deferred tax assets is assessed throughout the year and a valuation allowance is recorded, if necessary, to reduce net deferred tax assets to the amount more likely than not to be realized. As of October 1, 2023 and January 1, 2023, the Company had a valuation allowance for deferred income tax assets of $
The Company files a consolidated federal income tax return and files tax returns in various state and local jurisdictions. The statutes of limitations for consolidated federal income tax returns are open for fiscal years
As of October 1, 2023 and January 1, 2023, the Company had
The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted-average shares of common stock outstanding, reduced by shares repurchased and held in treasury, during the period. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding share option awards, nonvested share awards and nonvested share unit awards. During periods of net loss, diluted loss per share is equal to basic loss per share because the antidilutive effect of potential common shares is disregarded.
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
13 Weeks Ended |
|
39 Weeks Ended |
||||
|
|
October 1, |
|
October 2, |
|
October 1, |
|
October 2, |
|
|
(In thousands, except per share data) |
||||||
Net income |
|
$ |
|
$ |
|
$ |
|
$ |
Weighted-average shares of common stock |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
||||
Dilutive effect of common stock equivalents |
|
|
|
|
||||
Diluted |
|
|
|
|
||||
Basic earnings per share |
|
$ |
|
$ |
|
$ |
|
$ |
Diluted earnings per share |
|
$ |
|
$ |
|
$ |
|
$ |
Antidilutive share option awards excluded from |
|
|
|
|
||||
Antidilutive nonvested share awards excluded |
|
|
|
|
||||
The computation of diluted earnings per share for all periods presented excludes certain share option awards that were outstanding and antidilutive (i.e., including such share option awards would result in higher earnings per share) since the exercise prices of these share option awards exceeded the average market price of the Company’s common shares.
- 15 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The computation of diluted earnings per share for all periods presented excludes certain nonvested share awards that were outstanding and antidilutive since the grant date fair values of these nonvested share awards exceeded the average market price of the Company’s common shares.
Recovery of Insurance Proceeds
In the fourth quarter of fiscal 2022,
Legal Proceedings
On March 13, 2023, a complaint was filed in the Superior Court of the State of California, County of Santa Clara, entitled Zareyah Thompson v. Big 5 Corp., et. al., Case No. 23CV412334 (“Thompson Complaint”). The Thompson Complaint was brought as a purported California Private Attorneys General Act (“PAGA”) action on behalf of “current and former employees who worked for the Company or its operating subsidiary in California as a non-exempt, hourly paid employee and received at least one wage statement.” The Thompson Complaint alleges, among other things, that Big 5 failed to (i) provide minimum wages, (ii) provide compliant meal or rest periods, (iii) maintain and provide accurate itemized wage statements, (iv) properly compensate for all time worked, including overtime, premium, vacation and final wages, (v) properly maintain payroll records, and (vi) provide suitable seating. On March 21, 2023, a second complaint was filed in the Superior Court of the State of California, County of Santa Clara, entitled Christopher Puga v. Big 5 Corp., et. al., Case No. 23CV412953 (“Puga Complaint”). The Puga Complaint was brought as a purported PAGA action on behalf of “all current and former non-exempt employees that worked either directly or via a staffing agency for the Company or its operating subsidiary at any location in California” (“Putative Covered Employees”). The Puga Complaint alleges, among other things, that Big 5 (i) unlawfully required Putative Covered Employees to agree to unlawful criminal background checks, (ii) conducted unlawful financial and criminal background checks, and did not (iii) provide minimum wages, (iv) provide accurate itemized wage statements, (v) maintain accurate records pertaining to the Putative Covered Employees’ employment, (vi) produce or make available Putative Covered Employees’ personnel records and/or payroll records, (vii) provide compliant meal or rest periods, (viii) properly compensate for all time worked, including overtime, premium, vacation, and final wages, (ix) reimburse necessary business expenses; (x) provide suitable seating; (xi) provide sick leave pay to Putative Covered Employees, (xii) accurately calculate sick leave accrual and rate of pay, (xiii) put the Putative Covered Employees on notice of their paid sick leave rights, and (xiv) provide supplemental paid sick leave. The Thompson and Puga complaints have many overlapping causes of action. Accordingly, on or about April 12, 2023, a notice of related cases was filed with the Court regarding the Thompson Complaint and Puga Complaint. The Court subsequently conducted a case management conference on June 29, 2023 for both complaints, and jointly coordinated the complaints. The Company’s counsel held a mediation with opposing counsel on September 27, 2023. The Company has reached a tentative settlement in both cases and established a cumulative indemnity reserve of $
The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material effect on the Company’s results of operations, financial condition or cash flows.
- 16 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In June 2022, the Company amended and restated its 2019 Equity Incentive Plan (the “2019 Plan”), primarily authorizing an additional
At its discretion, the Company grants share option awards, nonvested share awards and nonvested share unit awards to certain employees, as defined by ASC 718, Compensation—Stock Compensation, under the Company’s 2019 Plan, and accounts for its share-based compensation in accordance with ASC 718. The Company recognized $
Share Option Awards
Share option awards granted by the Company generally vest and become exercisable in four equal annual installments of
A summary of the status of the Company’s share option awards is presented below:
|
|
Shares |
|
|
Weighted- |
|
|
Weighted- |
|
|
Aggregate |
|
||||
Outstanding at January 1, 2023 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding at October 1, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercisable at October 1, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Vested and Expected to Vest at October 1, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The aggregate intrinsic value represents the total pretax intrinsic value, based upon the Company’s most recent closing stock price of $
As of October 1, 2023, there was $
Nonvested Share Awards and Nonvested Share Unit Awards
Nonvested share awards granted by the Company vest for employees from the date of grant in four equal annual installments of
Nonvested share awards become outstanding when granted and are delivered to the recipient upon their vesting. Vested share unit awards, including any dividend reinvestments, are delivered to the recipient on the tenth business day of January following the year in which the recipient’s service to the Company is terminated, at which time the units convert to shares and become outstanding. The total fair value of nonvested share awards which vested during the first nine months of fiscal 2023 and 2022 was $
- 17 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company granted
A summary of the status of the Company’s nonvested share awards is presented below:
|
|
Shares |
|
|
Weighted- |
|
||
Balance at January 1, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Balance at October 1, 2023 |
|
|
|
|
$ |
|
||
To satisfy employee minimum statutory tax withholding requirements for nonvested share awards that vest, the Company withholds and retires a portion of the vesting common shares, unless an employee elects to pay cash. In the first nine months of fiscal 2023, the Company withheld
As of October 1, 2023, there was $
On October 26, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $
- 18 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Big 5 Sporting Goods Corporation
El Segundo, California
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Big 5 Sporting Goods Corporation and subsidiaries (the “Company”) as of October 1, 2023, the related condensed consolidated statements of operations and stockholders’ equity for the fiscal 13-week and 39-week periods ended October 1, 2023 and October 2, 2022, and of cash flows for the fiscal 39-week periods ended October 1, 2023 and October 2, 2022, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of January 1, 2023, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal year then ended (not presented herein); and in our report dated March 1, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 1, 2023, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Deloitte & Touche LLP
Los Angeles, California
November 1, 2023
- 19 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Big 5 Sporting Goods Corporation (“we,” “our,” “us”) financial condition and results of operations includes information with respect to our plans and strategies for our business and should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes (“Interim Financial Statements”) included herein, the Risk Factors included herein and in our other filings with the Securities and Exchange Commission (“SEC”), and our consolidated financial statements, related notes, Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023.
Our fiscal year ends on the Sunday nearest December 31. Fiscal 2023 is comprised of 52 weeks and ends on December 31, 2023. Fiscal 2022 was comprised of 52 weeks and ended on January 1, 2023. The interim periods in fiscal 2023 and 2022 are each comprised of 13 weeks.
Overview
We are a leading sporting goods retailer in the western United States, with 430 stores and an e-commerce platform under the name “Big 5 Sporting Goods” as of October 1, 2023. We provide a full-line product offering in a traditional sporting goods store format that averages approximately 12,000 square feet. Our 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.
In the first nine months of fiscal 2023 we opened two new stores and closed four stores, one of which was a relocation, and in the first nine months of fiscal 2022 we opened one new store which was a relocation. For fiscal 2023, we anticipate opening approximately two new stores and closing approximately six stores.
Executive Summary
Our net income in the third quarter of fiscal 2023 decreased compared with net income in the third quarter of fiscal 2022 primarily resulting from reduced net sales, which were partially offset by the favorable impact of higher merchandise margins and lower selling and administrative expense year over year. Reduced net sales in the third quarter of fiscal 2023 continued to reflect challenging macro-economic conditions including significant and persistent inflationary pressures that dampened consumer sentiment and weakened discretionary spending, which negatively impacted demand across each of our major merchandise categories of hardgoods, footwear and apparel.
- 20 -
Results of Operations
The results of the interim periods are not necessarily indicative of results for the entire fiscal year.
13 Weeks Ended October 1, 2023 Compared to 13 Weeks Ended October 2, 2022
The following table sets forth selected items from our interim unaudited condensed consolidated statements of operations by dollar and as a percentage of our net sales for the periods indicated:
|
|
13 Weeks Ended |
|
|||||||||||||
|
|
October 1, |
|
|
October 2, |
|
||||||||||
|
|
(Dollars in thousands) |
|
|||||||||||||
Net sales |
|
$ |
239,889 |
|
|
|
100.0 |
% |
|
$ |
261,445 |
|
|
|
100.0 |
% |
Cost of sales (1) |
|
|
160,331 |
|
|
|
66.8 |
|
|
|
174,862 |
|
|
|
66.9 |
|
Gross profit |
|
|
79,558 |
|
|
|
33.2 |
|
|
|
86,583 |
|
|
|
33.1 |
|
Selling and administrative expense (2) |
|
|
76,575 |
|
|
|
31.9 |
|
|
|
78,205 |
|
|
|
29.9 |
|
Operating income |
|
|
2,983 |
|
|
|
1.3 |
|
|
|
8,378 |
|
|
|
3.2 |
|
Interest (income) expense |
|
|
(95 |
) |
|
|
0.0 |
|
|
|
69 |
|
|
|
0.0 |
|
Income before income taxes |
|
|
3,078 |
|
|
|
1.3 |
|
|
|
8,309 |
|
|
|
3.2 |
|
Income tax expense |
|
|
1,220 |
|
|
|
0.5 |
|
|
|
1,940 |
|
|
|
0.7 |
|
Net income |
|
$ |
1,858 |
|
|
|
0.8 |
% |
|
$ |
6,369 |
|
|
|
2.5 |
% |
Net Sales. Net sales decreased by $21.5 million, or 8.2%, to $239.9 million in the third quarter of fiscal 2023 from $261.4 million in the third quarter last year. The change in net sales reflected the following:
- 21 -
Gross Profit. Gross profit decreased by $7.0 million to $79.6 million, or 33.2% of net sales, in the 13 weeks ended October 1, 2023, compared with $86.6 million, or 33.1% of net sales, in the 13 weeks ended October 2, 2022. The change in gross profit was primarily attributable to the following:
Selling and Administrative Expense. Selling and administrative expense decreased by $1.6 million to $76.6 million, or 31.9% of net sales, in the 13 weeks ended October 1, 2023, compared to $78.2 million, or 29.9% of net sales, in the third quarter of last year. The change in selling and administrative expense was primarily attributable to the following:
Interest (Income) Expense. Interest expense decreased by $0.2 million in the third quarter of fiscal 2023 compared to the third quarter of fiscal 2022 as a result of generating interest income for the current fiscal year reflecting higher interest earned on cash equivalents.
Income Tax Expense. The provision for income taxes was $1.2 million for the third quarter of fiscal 2023 compared to $1.9 million for the third quarter of fiscal 2022, primarily reflecting lower pre-tax income compared to the third quarter of fiscal 2022.
- 22 -
39 Weeks Ended October 1, 2023 Compared to 39 Weeks Ended October 2, 2022
The following table sets forth selected items from our interim unaudited condensed consolidated statements of operations by dollar and as a percentage of our net sales for the periods indicated:
|
|
39 Weeks Ended |
|
|||||||||||||
|
|
October 1, |
|
|
October 2, |
|
||||||||||
|
|
(Dollars in thousands) |
|
|||||||||||||
Net sales |
|
$ |
688,395 |
|
|
|
100.0 |
% |
|
$ |
757,226 |
|
|
|
100.0 |
% |
Cost of sales (1) |
|
|
461,790 |
|
|
|
67.1 |
|
|
|
495,844 |
|
|
|
65.5 |
|
Gross profit |
|
|
226,605 |
|
|
|
32.9 |
|
|
|
261,382 |
|
|
|
34.5 |
|
Selling and administrative expense (2) |
|
|
224,114 |
|
|
|
32.6 |
|
|
|
230,150 |
|
|
|
30.4 |
|
Operating income |
|
|
2,491 |
|
|
|
0.3 |
|
|
|
31,232 |
|
|
|
4.1 |
|
Interest (income) expense |
|
|
(265 |
) |
|
|
0.0 |
|
|
|
389 |
|
|
|
0.1 |
|
Income before income taxes |
|
|
2,756 |
|
|
|
0.3 |
|
|
|
30,843 |
|
|
|
4.0 |
|
Income tax expense |
|
|
987 |
|
|
|
0.1 |
|
|
|
6,437 |
|
|
|
0.9 |
|
Net income |
|
$ |
1,769 |
|
|
|
0.2 |
% |
|
$ |
24,406 |
|
|
|
3.1 |
% |
Net Sales. Net sales decreased by $68.8 million, or 9.1%, to $688.4 million in the first nine months of fiscal 2023 from $757.2 million in the first nine months of last year. The change in net sales reflected the following:
Gross Profit. Gross profit decreased by $34.8 million to $226.6 million, or 32.9% of net sales, in the 39 weeks ended October 1, 2023, compared with $261.4 million, or 34.5% of net sales, in the 39 weeks ended October 2, 2022. The change in gross profit was primarily attributable to the following:
- 23 -
Selling and Administrative Expense. Selling and administrative expense decreased by $6.1 million to $224.1 million, or 32.6% of net sales, in the 39 weeks ended October 1, 2023, compared to $230.2 million, or 30.4% of net sales, in the first nine months of last year. The change in selling and administrative expense was primarily attributable to the following:
Interest (Income) Expense. Interest expense decreased by $0.7 million in the first nine months of fiscal 2023 compared to the first nine months of fiscal 2022 as a result of generating interest income for the current fiscal year reflecting higher interest earned on cash equivalents.
Income Tax Expense. The provision for income taxes was $1.0 million for the first nine months of fiscal 2023 compared to $6.4 million for the first nine months of fiscal 2022, primarily reflecting lower pre-tax income and a tax deduction related to share-based compensation compared to the first nine months of fiscal 2022.
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements primarily through cash and cash equivalents, cash flows from operations and borrowings from the revolving credit facility, when necessary.
As of October 1, 2023, we had $17.9 million of cash compared to $34.4 million of cash and cash equivalents as of October 2, 2022. Our cash flows from operating, investing and financing activities are summarized as follows:
|
|
39 Weeks Ended |
|
|||||
|
|
October 1, |
|
|
October 2, |
|
||
|
|
(In thousands) |
|
|||||
Total cash provided by (used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
21,064 |
|
|
$ |
(29,918 |
) |
Investing activities |
|
|
(8,186 |
) |
|
|
(8,814 |
) |
Financing activities |
|
|
(20,573 |
) |
|
|
(24,249 |
) |
Net decrease in cash and cash equivalents |
|
$ |
(7,695 |
) |
|
$ |
(62,981 |
) |
Operating Activities. Operating cash flows for the first nine months of fiscal 2023 and 2022 were a positive $21.1 million and a negative $29.9 million, respectively. The increased cash flow provided by operating activities for the first nine months of fiscal 2023 compared to the prior year primarily reflects decreased funding of merchandise inventory and accrued expenses, primarily related to company performance-based incentive accruals, partially offset by lower net income.
- 24 -
Investing Activities. Net cash used in investing activities for the first nine months of fiscal 2023 and 2022 was $8.2 million and $8.8 million, respectively. Capital expenditures, excluding non-cash acquisitions, represented substantially all of the cash used in investing activities for each period. Capital expenditures for both periods primarily reflect store-related remodeling, distribution center investments and computer hardware and software purchases.
Financing Activities. Financing cash flows for the first nine months of fiscal 2023 and 2022 were a negative $20.6 million and a negative $24.2 million, respectively. For the first nine months of both periods, cash was used primarily to fund dividend payments and make principal payments on finance lease liabilities. For the first nine months of fiscal 2022, cash was also used to purchase treasury stock.
As of October 1, 2023 and October 2, 2022, we had no revolving credit borrowings, and $1.4 million and $1.1 million, respectively, of letter of credit commitments outstanding.
In fiscal 2022 we paid four quarterly cash dividends of $0.25 per share of outstanding common stock. In the first nine months of fiscal 2023, we paid three quarterly cash dividends of $0.25 per share of outstanding common stock, and in the fourth quarter of fiscal 2023, our Board of Directors declared a quarterly cash dividend of $0.125 per share of outstanding common stock, which will be paid on December 15, 2023 to stockholders of record as of December 1, 2023.
Periodically, we repurchase our common stock in the open market pursuant to programs approved by our Board of Directors. We may repurchase our common stock for a variety of reasons, including, among other things, our alternative cash requirements, existing business conditions and the current market price of our stock. In the first quarter of fiscal 2022, our Board of Directors authorized a new share repurchase program of up to $25.0 million of our common stock, which replaced the previous share repurchase program. Under this program, we may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the SEC. However, the timing and amount of such purchases, if any, would be at the discretion of our management and Board of Directors, and would depend on market conditions and other considerations. We repurchased 295,719 shares of our common stock for $4.1 million in the full year of fiscal 2022. We did not repurchase any shares of our common stock in the first nine months of fiscal 2023. Since the inception of our initial share repurchase program in May 2006 through October 1, 2023, we have repurchased a total of 4,186,014 shares for $53.6 million.
Loan Agreement. We are party to a Loan, Guaranty and Security agreement with Bank of America, N.A. (“BofA”), as agent and lender, which was amended on November 22, 2021, October 19, 2022 and May 16, 2023 (as so amended, the “Loan Agreement”). The Loan Agreement has a maturity date of February 24, 2026 and provides for a revolving credit facility with an aggregate committed availability of up to $150.0 million. We may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lender under the Loan Agreement will have the option to increase their commitment to accommodate the requested increase. If the lender does not exercise that option, we may (with the consent of BofA in its role as the administrative agent, not to be unreasonably withheld) seek other lenders willing to provide such commitments. The credit facility includes a $50.0 million sublimit for issuances of letters of credit.
We may borrow under the Loan Agreement from time to time, provided the amounts outstanding will not exceed the lesser of the then aggregate committed availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Line Cap”). As defined in the Loan Agreement, the “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a) 90.00% of eligible credit card receivables; plus (b) the cost of eligible inventory (other than eligible in-transit inventory), net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); plus (c) the cost of eligible in-transit inventory, net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible in-transit inventory (expressed as a percentage of the cost of eligible in-transit inventory), minus (d) certain agreed-upon reserves as well as other reserves established by BofA in its role as the administrative agent in its reasonable discretion.
- 25 -
Generally, we may designate specific borrowings under the Loan Agreement as either base rate loans or Term SOFR rate loans. The applicable interest rate on our borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Line Cap over amounts borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as Term SOFR rate loans bear interest at a rate equal to the then applicable secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) rate plus a 0.10% “SOFR adjustment” spread, plus an applicable margin as shown in the table below. Those loans designated as base rate loans bear interest at a rate equal to the applicable margin for base rate loans (as shown below) plus the highest of (a) the Federal funds rate, as in effect from time to time, plus one-half of one percent (0.50%), (b) the one-month SOFR rate, plus one percentage point (1.00%), or (c) the rate of interest in effect for such day as announced from time to time within BofA as its “prime rate.” The applicable margin for all loans will be a function of Average Daily Availability for the preceding fiscal quarter as set forth below.
Level |
|
Average Daily Availability |
|
SOFR Rate |
|
Base Rate |
I |
|
Greater than or equal to $70,000,000 |
|
1.375% |
|
0.375% |
II |
|
Less than $70,000,000 |
|
1.500% |
|
0.500% |
The commitment fee assessed on the unused portion of the credit facility is 0.20% per annum.
Obligations under the Loan Agreement are secured by a general lien on and security interest in substantially all of our assets. The Loan Agreement contains covenants that require us to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances, and limits the ability to, among other things, incur liens, incur additional indebtedness, transfer or dispose of assets, change the nature of the business, guarantee obligations, pay dividends or make other distributions or repurchase stock, and make advances, loans or investments. We may generally declare or pay cash dividends or repurchase stock only if, among other things, no default or event of default then exists or would arise from such dividend or repurchase of stock and, after giving effect to such dividend or repurchase, certain availability and/or fixed charge coverage ratio requirements are satisfied, although we are permitted to make up to $5.0 million of dividend payments or stock repurchases per year without satisfaction of the availability or fixed charge coverage ratio requirements, but dividends or stock repurchases made without satisfying the availability and/or fixed charge coverage ratio requirements will require the establishment of an additional reserve that will reduce borrowing availability under the Loan Agreement for 75 days. The Loan Agreement contains customary events of default, including, without limitation, failure to pay when due principal amounts with respect to the credit facility, failure to pay any interest or other amounts under the credit facility, failure to comply with certain agreements or covenants contained in the Loan Agreement, failure to satisfy certain judgments against us, failure to pay when due (or any other default which permits the acceleration of) certain other material indebtedness in principal amount in excess of $5.0 million, and certain insolvency and bankruptcy events.
Future Capital Requirements. We had cash of $17.9 million as of October 1, 2023. We expect capital expenditures for fiscal 2023, excluding non-cash acquisitions, to range from approximately $8.0 million to $12.0 million primarily to fund store-related remodeling, the opening of new stores, distribution center investments and computer hardware and software purchases. For fiscal 2023, we anticipate opening approximately two new stores and closing approximately six stores.
Dividends are paid at the discretion of our Board of Directors. In fiscal 2022 we paid four quarterly cash dividends of $0.25 per share of outstanding common stock. In the first nine months of fiscal 2023, we paid three quarterly cash dividends of $0.25 per share of outstanding common stock, and in the fourth quarter of fiscal 2023, our Board of Directors declared a quarterly cash dividend of $0.125 per share of outstanding common stock, which will be paid on December 15, 2023 to stockholders of record as of December 1, 2023.
As of October 1, 2023, a total of $20.9 million remained available for share repurchases under our new share repurchase program. We did not repurchase any shares of our common stock in the first nine months of fiscal 2023. We consider several factors in determining when and if we make share repurchases including, among other things, our alternative cash requirements, existing business conditions and the market price of our stock.
We believe we will be able to fund our cash requirements from cash and cash equivalents, operating cash flows and borrowings from our credit facility, for at least the next 12 months.
- 26 -
Contractual Obligations. Our material contractual obligations include operating lease commitments associated with our leased properties and other occupancy expense, finance lease obligations, borrowings under the credit facility, if any, and other liabilities. Operating lease commitments consist principally of leases for our retail store facilities, distribution center and corporate offices. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term, and we intend to renegotiate most of these leases as they expire. Operating lease commitments also consist of information technology (“IT”) systems hardware, distribution center delivery tractors and equipment. Additional information regarding our operating and finance leases is available in Notes 2 and 5 to the Interim Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
In the first nine months of fiscal 2023 and 2022, we had zero borrowings under our revolving credit facility.
In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery. Because most of these purchase orders do not contain any termination payments or other penalties if cancelled, they are not included as outstanding contractual obligations.
Critical Accounting Estimates
As discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, we consider our estimates on valuation of merchandise inventory and valuation of long-lived assets to be among the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. There have been no significant changes to these estimates in the 39 weeks ended October 1, 2023.
Seasonality and Impact of Inflation
We experience seasonal fluctuations in our net sales and operating results, which can suffer when weather does not conform to seasonal norms. Seasonality in our net sales influences our buying patterns which directly impacts our merchandise and accounts payable levels and cash flows. We purchase merchandise for seasonal activities in advance of a season and supplement our merchandise assortment as necessary and when possible during the season. Our efforts to replenish products during a season are not always successful. In the fourth fiscal quarter, which includes the holiday selling season and the start of the winter selling season, we normally experience higher inventory purchase volumes and increased expense for staffing and advertising. If we miscalculate the consumer demand for our products generally or for our product mix in advance of a season, particularly the fourth quarter, our net sales can decline, which can harm our financial performance. A significant shortfall from expected net sales, particularly during the fourth quarter, can negatively impact our annual operating results.
In fiscal 2022 and the first nine months of fiscal 2023, we experienced greater inflation in the cost of products that we purchase for resale than in previous years. While our merchandise inventory costs have been impacted by inflationary pressures, we have generally been able to adjust our selling prices in response to these higher product purchase costs. However, if we are unable to adjust our selling prices for product purchase cost increases that might occur in the future, then our merchandise margins could decline, which would adversely impact our operating results. In fiscal 2022 and the first nine months of fiscal 2023, we also experienced increased wage rate pressure as a result of higher demand and competition for labor in many of our markets and we expect these dynamics to continue in fiscal 2023. Broad-based inflationary pressures adversely impacted many categories of costs and expenses during fiscal 2022 and the first nine months of fiscal 2023. This impact is expected to continue during the remainder of fiscal 2023.
Recently Issued Accounting Updates
See Note 2 to the Interim Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
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Forward-Looking Statements
This document includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, our financial condition, our results of operations, our growth strategy and the business of our company generally. In some cases, you can identify such statements by terminology such as “may,” “could,” “project,” “estimate,” “potential,” “continue,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends” or other such terminology. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause our actual results in current or future periods to change significantly and differ materially from forecasted results. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause our actual results in current or future periods to change significantly and differ materially from forecasted results. These risks and uncertainties include, among other things, the economic impacts of COVID-19, including any potential variants, on our business operations, including as a result of regulations that may be issued in response to COVID-19, global supply chain disruptions resulting from the ongoing conflict in Ukraine, changes in the consumer spending environment, fluctuations in consumer holiday spending patterns, increased competition from e-commerce retailers, breach of data security or other unauthorized disclosure of sensitive personal or confidential information, the competitive environment in the sporting goods industry in general and in our specific market areas, inflation, product availability and growth opportunities, changes in the current market for (or regulation of) firearm-related products, a reduction or loss of product from a key supplier, disruption in product flow, seasonal fluctuations, weather conditions, changes in cost of goods, operating expense fluctuations, increases in labor and benefit-related expense, changes in laws or regulations, including those related to tariffs and duties as well as environmental, social and governance issues, public health issues (including those caused by COVID-19 or any potential variants), impacts from civil unrest or widespread vandalism, lower than expected profitability of our e-commerce platform or cannibalization of sales from our existing store base which could occur as a result of operating the e-commerce platform, litigation risks, stockholder campaigns and proxy contests, risks related to our historically leveraged financial condition, changes in interest rates, credit availability, higher expense associated with sources of credit resulting from uncertainty in financial markets and economic conditions in general. Those and other risks and uncertainties are more fully described in Part II, Item 1A, Risk Factors, in this report and in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K and other filings with the SEC. We caution that the risk factors set forth in this report and the other reports that we file with the SEC are not exclusive. In addition, we conduct our business in a highly competitive and rapidly changing environment. Accordingly, new risk factors may arise. It is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. We undertake no obligation to revise or update any forward-looking statement that may be made from time to time by us or on our behalf.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Because we are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended October 1, 2023, no changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 13, 2023, a complaint was filed in the Superior Court of the State of California, County of Santa Clara, entitled Zareyah Thompson v. Big 5 Corp., et. al., Case No. 23CV412334 (“Thompson Complaint”). The Thompson Complaint was brought as a purported California Private Attorneys General Act (“PAGA”) action on behalf of “current and former employees who worked for the Company or its operating subsidiary in California as a non-exempt, hourly paid employee and received at least one wage statement.” The Thompson Complaint alleges, among other things, that Big 5 failed to (i) provide minimum wages, (ii) provide compliant meal or rest periods, (iii) maintain and provide accurate itemized wage statements, (iv) properly compensate for all time worked, including overtime, premium, vacation and final wages, (v) properly maintain payroll records, and (vi) provide suitable seating. On March 21, 2023, a second complaint was filed in the Superior Court of the State of California, County of Santa Clara, entitled Christopher Puga v. Big 5 Corp., et. al., Case No. 23CV412953 (“Puga Complaint”). The Puga Complaint was brought as a purported PAGA action on behalf of “all current and former non-exempt employees that worked either directly or via a staffing agency for the Company or its operating subsidiary at any location in California” (“Putative Covered Employees”). The Puga Complaint alleges, among other things, that Big 5 (i) unlawfully required Putative Covered Employees to agree to unlawful criminal background checks, (ii) conducted unlawful financial and criminal background checks, and did not (iii) provide minimum wages, (iv) provide accurate itemized wage statements, (v) maintain accurate records pertaining to the Putative Covered Employees’ employment, (vi) produce or make available Putative Covered Employees’ personnel records and/or payroll records, (vii) provide compliant meal or rest periods, (viii) properly compensate for all time worked, including overtime, premium, vacation, and final wages, (ix) reimburse necessary business expenses; (x) provide suitable seating; (xi) provide sick leave pay to Putative Covered Employees, (xii) accurately calculate sick leave accrual and rate of pay, (xiii) put the Putative Covered Employees on notice of their paid sick leave rights, and (xiv) provide supplemental paid sick leave. The Thompson and Puga complaints have many overlapping causes of action. Accordingly, on or about April 12, 2023, a notice of related cases was filed with the Court regarding the Thompson Complaint and Puga Complaint. The Court subsequently conducted a case management conference on June 29, 2023 for both complaints, and jointly coordinated the complaints. The Company’s counsel held a mediation with opposing counsel on September 27, 2023. The Company has reached a tentative settlement in both cases and established a cumulative indemnity reserve of $1.5 million. Any settlement finalized will be subject to Court approval.
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s results of operations or financial condition.
Item 1A. Risk Factors
There have been no material changes to the risk factors identified in Part I, Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the fiscal quarter ended October 1, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
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Item 6. Exhibits
Exhibit Number |
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Description of Document |
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15.1 |
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Independent Auditors’ Awareness Letter Regarding Interim Financial Statements. (1) |
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31.1 |
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Rule 13a-14(a) Certification of Chief Executive Officer. (1) |
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31.2 |
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Rule 13a-14(a) Certification of Chief Financial Officer. (1) |
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32.1 |
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32.2 |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. (1) |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. (1) |
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101.CAL |
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Inline XBRL Taxonomy Calculation Linkbase Document. (1) |
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101.DEF |
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Inline XBRL Taxonomy Definition Linkbase Document. (1) |
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101.LAB |
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Inline XBRL Taxonomy Label Linkbase Document. (1) |
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101.PRE |
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Inline XBRL Taxonomy Presentation Linkbase Document. (1) |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document). (1) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BIG 5 SPORTING GOODS CORPORATION, |
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a Delaware corporation |
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Date: November 1, 2023 |
By: |
/s/ Steven G. Miller |
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Steven G. Miller |
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Chairman of the Board of Directors, President and Chief Executive Officer |
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Date: November 1, 2023 |
By: |
/s/ Barry D. Emerson |
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Barry D. Emerson |
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Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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