(BGFV) Big 5 Sporting Goods Corporation Upgraded to Neutral

We have upgraded our long-term recommendation on the U.S. based sporting goods retailer Big 5 Sporting Goods Corporation (BGFV) to Neutral from Underperform with a target price of $8.50. This rating upgrade was driven by the company’s continuous better-than-expected bottom line performance in the last three quarters of fiscal 2011.

Big 5 Sporting’s earnings per share came ahead of the Zacks Consensus Estimate in the last three quarters with an earnings surprise history of 60%, 58.8% and 25% in second, third and fourth quarter, respectively. (For further details, please visit: Surprise – Reported Earnings History)

Further, during the last three quarters of fiscal 2011, the company has surpassed and met its own earnings guidance. Big 5 Sporting’s second-quarter earnings of 16 cents per share beat its own guidance range of 6 cents to 14 cents.

In a similar fashion, the company’s third-quarter earnings of 27 cents per share came well ahead of its guidance range of 12 – 20 cents. While fourth-quarter earnings of 5 cents per share met the company’s higher guidance range 2 – 5 cents.

For fiscal 2011, Big 5 reported adjusted earnings of 60 cents per share, which was above the Zacks Consensus Estimate of 58 cents per share and the company’s January 2012 guidance range of 55 – 58 cents per share. Moreover, the company’s net sales of $902.1 million for the fiscal came almost in line with the Zacks Consensus Estimate of $903 million.

Moreover, Big 5 Sporting is in midst of its store expansion strategy in the emerging markets. During the period of recession in 2009, the company slowed down its store expansion program. Big 5 have now resumed its strategy of store expansion, which we believe will be accretive for its future growth. Big 5 targets to open nearly 10 new stores and will relocate about 7 stores in fiscal 2012.

Further, Big 5 Sporting’s unique strategy of offering exclusive branded merchandise sourced from leading manufacturers provide it with a competitive edge over its rivals in the specialty retailing industry.

In addition, Big 5 is introducing a business intelligence system, which will help in making decision for merchandising and assortment selection at the store level. Moreover, the company has opened a new distribution center in Oregon, which will service about 75 stores in the Pacific Northwest. The new distribution channel is expected to save about $800,000 in transportation expense annually.

However, Big 5’s business is seasonal in nature and typically generates stronger sales during the fourth quarter, which is characterized by the holiday and winter sports selling seasons. Therefore, the company is exposed to significant risks if the seasons fail to deliver expected operating performance.

Above all, the company operates in a highly fragmented specialty retail sector and faces intense competition from national chains, such as Dick’s Sporting Goods Inc. (DKS), Bass Pro Shops, Foot Locker Inc. (FL) and Hibbett Sports Inc. (HIBB); mass merchandisers, such as Wal-Mart Stores Inc. (WMT) and Target Corporation (TGT), as well as regional and local sporting goods stores. Consequently, it may hurt the company’s future operating performance.

Although, the company has been posting better-than-expected quarterly results but we still await a catalyst to drive a bottom line growth for the company.

Our recommendation on the stock is supported by a Zacks #3 Rank, which implies a short-term Hold rating.
BIG 5 SPORTING (BGFV): Free Stock Analysis Report

DICKS SPRTG GDS (DKS): Free Stock Analysis Report

FOOT LOCKER INC (FL): Free Stock Analysis Report

HIBBET SPORTS (HIBB): Free Stock Analysis Report

TARGET CORP (TGT): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

View original at: Zacks Investment Research – All Commentary Articles

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