For the transition period from _____________________ to ______________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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.
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the voting stock held by non-affiliates of the registrant was $32,282,404 as of June 28, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) based upon the closing price of the registrant’s common stock on the NASDAQ Stock Market LLC reported for June 26, 2020. Shares of common stock held by each executive officer and director and by each person who, as of such date, may be deemed to have beneficially owned more than 5% of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates of the registrant under certain circumstances. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.
The registrant had 21,934,334 shares of common stock outstanding at February 23, 2021.
Part III of this Form 10-K incorporates by reference certain information from the registrant’s 2021 definitive proxy statement (the “Proxy Statement”) to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year.
PART I
General
Big 5 Sporting Goods Corporation (“we,” “our,” “us” or the “Company”) is a leading sporting goods retailer in the western United States, operating 430 stores and an e-commerce platform under the “Big 5 Sporting Goods” name as of January 3, 2021. We provide a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 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. We supplement our traditional sports merchandise mix with an assortment of other products that we purchase through opportunistic buys of vendor over-stock or close-out merchandise.
We believe that over our 66-year history we have developed a reputation with the competitive and recreational sporting goods customer as a convenient neighborhood sporting goods retailer that consistently delivers value on quality merchandise. Our stores carry a wide range of products at competitive prices from well-known brand name manufacturers, including adidas, Coleman, Columbia, Everlast, New Balance, Nike, Rawlings, Skechers, Spalding, Under Armour and Wilson. We also offer brand name merchandise produced exclusively for us, private label merchandise and specials on quality items we purchase through opportunistic buys of vendor over-stock and close-out merchandise. We reinforce our value reputation through digital marketing programs, print advertising in major and local newspapers, and direct mailers designed to generate customer traffic, drive net sales and build brand awareness. We also maintain social media sites to enhance distribution capabilities for our promotional offers and to enable communication with our customers.
Robert W. Miller co-founded our company in 1955 with the establishment of five retail locations in California. We sold World War II surplus items until 1963, when we began focusing exclusively on sporting goods and changed our trade name to “Big 5 Sporting Goods.” In 1971, we were acquired by Thrifty Corporation, which was subsequently purchased by Pacific Enterprises. In 1992, management bought our company in conjunction with Green Equity Investors, L.P., an affiliate of Leonard Green & Partners, L.P. In 1997, Robert W. Miller, Steven G. Miller and Green Equity Investors, L.P. recapitalized our company so that the majority of our common stock would be owned by our management and employees. In 2002, we completed an initial public offering of our common stock and became a publicly-traded company.
Our accumulated management experience and expertise in sporting goods merchandising, advertising, operations, store development and overall cost management have enabled us to generally produce profitable results. We believe our historical success can be attributed to a value-based and execution-driven operating philosophy, a controlled growth strategy and a proven business model. Additional information regarding our management experience is available in Item 1, Business, under the sub-heading “Management Experience,” of this Annual Report on Form 10-K.
We are a holding company incorporated in Delaware on October 31, 1997. We conduct our business through Big 5 Corp., a 100%-owned subsidiary incorporated in Delaware on October 27, 1997. We conduct our gift card operations through Big 5 Services Corp., a 100%-owned subsidiary of Big 5 Corp. incorporated in Virginia on December 19, 2003.
Our corporate headquarters are located at 2525 East El Segundo Boulevard, El Segundo, California 90245. Our Internet address is www.big5sportinggoods.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments, if any, to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, are available on our website, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
COVID-19 Update
During March 2020, the World Health Organization declared the rapidly growing novel coronavirus (“COVID-19”) outbreak to be a global pandemic. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine.
4
Beginning on March 20, 2020, we temporarily closed more than one-half of our retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. We were subsequently able to gradually reopen all store locations based initially on qualifying as an “essential” business under applicable regulations and later as a result of the easing of regulatory restrictions on retail operations in our market areas. In an effort to promote social distancing protocols, we implemented reduced store hours for our open stores and limited the number of customers in our stores at any one time. These temporary store closures, limited hours of operation and shelter orders in our market areas related to the COVID-19 outbreak resulted in an overall decrease in same store sales volume in the second quarter of fiscal 2020 compared with the prior year. However, as we began reopening stores, we recognized significant shifts in consumer demand for fitness and outdoor recreational activities and we rapidly evolved our product assortment, and for the second half of fiscal 2020 our same store sales significantly increased compared to the prior year. As of January 3, 2021, all of our stores that were temporarily closed due to COVID-19 had reopened for in-store shopping, subject to continued appropriate social distancing restrictions and with reduced operating hours.
The initial decrease in sales caused by the COVID-19 outbreak caused us to take various actions to enhance our liquidity, which included initial increased borrowings under our revolving credit facility, expense reductions across the organization, including lease concessions negotiated with landlords that reduced or deferred our lease-related payments, scaled-back merchandise inventory orders and extended payment terms with merchandise vendors, temporary and permanent workforce reductions implemented throughout the organization, reduced advertising and capital spending in fiscal 2020, and the suspension of our quarterly dividend payment, among other measures. Although a certain portion of the expense reduction initiatives only benefited the second quarter of fiscal 2020, the remainder of fiscal 2020 continued to reflect labor expense savings due primarily to reduced store operating hours, as well as advertising expense savings due to significantly reduced advertising activity. We have since been able to pay down our borrowings under the credit facility to zero while increasing our levels of cash and cash equivalents, and we were able to reinstate and increase our previously-suspended dividend.
Expansion and Store Development
Throughout our operating history, we have sought to expand our business with the addition of new stores through a disciplined strategy of controlled growth. Our expansion within the western United States has typically been systematic and designed to capitalize on our name recognition, economical store format and economies of scale related to distribution and advertising. Over the past five fiscal years, we have opened 18 stores including relocations, of which 61% were in California. Our store openings over the past five fiscal years reflect our cautious approach toward store expansion in the current retail environment, which included the liquidation and closure of certain major competitors in our markets in fiscal 2016, increasing ecommerce competition and the COVID-19 pandemic in fiscal 2020. The following table reflects our store opening, closing and relocation activity during the periods indicated:
|
|
Stores Opened
|
|
|
|
|
|
|
|
|
Number of Stores
|
|
Year
|
|
California
|
|
|
Other Markets
|
|
|
Total
|
|
|
Stores Relocated
|
|
|
Stores Closed
|
|
at Period End
|
|
2016
|
|
|
3
|
|
|
|
2
|
|
|
|
5
|
|
|
(1)
|
|
|
(10)
|
|
|
432
|
|
2017
|
|
|
2
|
|
|
|
4
|
|
|
|
6
|
|
|
(1)
|
|
|
(2)
|
|
|
435
|
|
2018
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
|
(1)
|
|
|
(2)
|
|
|
436
|
|
2019
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
(1)
|
|
|
(4)
|
|
|
434
|
|
2020
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(4)
|
|
|
430
|
|
Our store format enables us to have substantial flexibility regarding new store locations. We have successfully operated stores in major metropolitan areas and in areas with as few as 30,000 people. Our 11,000 average square foot store format differentiates us from superstores that typically average over 35,000 square feet, require larger target markets, are more expensive to operate and require higher net sales per store for profitability.
New store openings typically represent attractive investment opportunities due to the relatively low investment required and the relatively short time necessary before our stores typically become profitable. Our store format normally requires investments of approximately $0.5 million in fixtures, equipment and leasehold improvements, net of landlord allowances, and approximately $0.3 million in net working capital with limited pre-opening and real estate expense related to leased locations that are built to our specifications. We seek to maximize new store performance by staffing new store management with experienced personnel from our existing stores.
Our in-house store development personnel analyze new store locations with the assistance of real estate firms that specialize in retail properties. We seek expansion opportunities to further penetrate our established markets, develop recently entered markets and expand into new, contiguous markets with attractive demographic, competitive and economic profiles.
5
Merchandising
We target the competitive and recreational sporting goods customer with a full-line product offering at a wide variety of price points. We offer a product mix that 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. We believe we offer consistent value to consumers by offering a distinctive merchandise mix that includes a combination of well-known brand name merchandise, merchandise produced exclusively for us under a manufacturer’s brand name, private label merchandise and specials on quality items we purchase through opportunistic buys of vendor over-stock and close-out merchandise.
Through our 66 years of experience across different demographic, competitive and economic markets, we have refined our merchandising strategy in an effort to offer a selection of products that meets customer demand. Specifically, we continue to strategically refine our merchandise and marketing strategies in order to better align our product mix and promotional efforts with today’s consumer.
The following table illustrates our mix of soft goods, which are non-durable items such as shirts and shoes, and hard goods, which are durable items such as exercise equipment and baseball gloves, as a percentage of net sales. The change in sales mix for fiscal 2020 reflects the change in consumer demand resulting from the COVID-19 pandemic, including higher sales related to fitness and outdoor recreational activities and reduced sales for team sports and back to school products:
|
|
Fiscal Year
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Soft goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Athletic and sport apparel
|
|
|
17.8
|
%
|
|
|
22.1
|
%
|
|
|
21.0
|
%
|
|
|
20.6
|
%
|
|
|
19.7
|
%
|
Athletic and sport footwear
|
|
22.0
|
|
|
28.2
|
|
|
28.6
|
|
|
28.7
|
|
|
28.2
|
|
Total soft goods
|
|
39.8
|
|
|
50.3
|
|
|
49.6
|
|
|
49.3
|
|
|
47.9
|
|
Hard goods
|
|
60.2
|
|
|
49.7
|
|
|
50.4
|
|
|
50.7
|
|
|
52.1
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
We purchase our popular branded merchandise from an extensive list of major sporting goods equipment, athletic footwear and apparel manufacturers. Below is a selection of some of the brands we carry:
adidas
|
Coleman
|
Footjoy
|
Impex
|
Nike
|
Skechers
|
Asics
|
Columbia
|
Franklin
|
JanSport
|
Rawlings
|
Spalding
|
Bearpaw
|
Crosman
|
Gildan
|
Lifetime
|
Razor
|
Speedo
|
Bushnell
|
Daisy
|
Head
|
McDavid
|
Remington
|
Timex
|
Callaway
|
Dickies
|
Heelys
|
Mizuno
|
Rollerblade
|
Titleist
|
Camp Chef
|
Easton
|
Hillerich & Bradsby
|
Mossberg
|
Russell Athletic
|
Under Armour
|
Carhartt
|
Everlast
|
Icon (Proform)
|
Mueller Sports Medicine
|
Saucony
|
Wilson
|
Casio
|
Fila
|
Igloo
|
New Balance
|
Shimano
|
Winchester
|
We believe we enjoy significant advantages in making opportunistic buys of vendor over-stock and close-out merchandise because of our strong vendor relationships, purchasing volume and rapid decision-making process. Our strong vendor relationships and purchasing volume also enable us to purchase merchandise produced exclusively for us under a manufacturer’s brand name which allows us to differentiate our product selection from competition, obtain volume pricing discounts from vendors and offer unique value to our customers. Our weekly advertising highlights our opportunistic buys together with merchandise produced exclusively for us in order to reinforce our reputation as a retailer that offers attractive values to our customers.
In order to complement our branded product offerings, we offer a variety of private label merchandise, which represents approximately 2% of our net sales. Our sale of private label merchandise enables us to provide our customers with a broader selection of quality merchandise at a wider range of price points and allows us the potential to achieve higher margins than on sales of comparable name brand products. Our private label items include shoes, apparel, camping equipment, fishing supplies and snowsport equipment.
Seasonality influences our buying patterns and we purchase merchandise for seasonal activities in advance of a season and supplement our merchandise assortment as necessary and when possible during the season. We tailor our merchandise selection on a store-by-store basis in an effort to satisfy each region’s specific needs and seasonal buying habits. In the fourth fiscal quarter we normally experience higher inventory purchase volumes in anticipation of the winter and holiday selling season.
Our buyers, who average 18 years of experience with us, work in collaboration with senior management to determine and enhance product selection, promotion and pricing of our merchandise mix. Management utilizes integrated merchandising, business intelligence analytics, distribution, point-of-sale and financial information systems to continuously refine our merchandise mix, pricing strategy, advertising effectiveness and inventory levels to best serve the needs of our customers.
6
Advertising and Marketing
Through years of targeted advertising, we have solidified our reputation for offering quality products at attractive prices. We drive customer traffic through the effective use of both digital communications as well as print media.
We built our value-based brand through weekly print advertisements since 1955, and we provide print advertisements and other targeted promotional offers through carrier delivery and direct mail. Over the last several years we have been shifting our advertising spend away from print media towards digital advertising. In fiscal 2020, we accelerated the reduction of print advertising in response to the COVID-19 pandemic and we expect our print advertising to remain substantially reduced in fiscal 2021 as we continue to evaluate our advertising programs. The consistency and reach of our digital and print advertising programs have historically driven sales and create high customer awareness of the name “Big 5 Sporting Goods.”
We promote our products through digital marketing programs that include sending daily digital communications to our customers (e-mail marketing to our “E-Team”), search engine marketing, social media including Facebook, Twitter and Instagram, mobile programs and other website initiatives.
Our digital promotional strategy is designed to provide opportunities to connect with potential customers and enable us to promote the Big 5 brand. Our e-mail marketing program invites our customers to subscribe to our E-Team for daily special deals, weekly advertisements and product information disseminated on a regular basis. We use search engine marketing methods as a means to reach those customers searching the Internet to gather information about our products. Within our social media program, our customers have the opportunity to engage in conversations with other sports-minded people and receive exclusive information about new products and unique weekly offers. All of these marketing methods are intended to simplify the shopping experience for our customers and further demonstrate our commitment to provide great brands at great values.
Our website features a broad representation of our product assortment and provides visibility of store inventory to our customers, thereby enabling them to determine if items featured on our website are in-stock in one or more of our store locations. Our e-commerce platform delivers an online shopping experience to our customers, and we continue to develop our online capabilities to meet customer expectations of being able to shop at their convenience.
We have developed a strong cause marketing platform through our 21-year support of the March of Dimes annual fundraising campaign and numerous other charities and organizations throughout our marketplace. We also build brand awareness by providing sponsorship support of established, high profile events that benefit our customers’ active lifestyles, such as the “LA Marathon” in Los Angeles, California, and the “Duke City Marathon” in Albuquerque, New Mexico, for which we are the title sponsor.
Vendor Relationships
We have developed strong vendor relationships over the past 66 years. We currently purchase merchandise from over 680 vendors. In fiscal 2020, only one vendor represented greater than 5% of total purchases, at 8.5%. We believe current relationships with our vendors are good. We benefit from the long-term working relationships with vendors that our senior management and our buyers have carefully nurtured throughout our history.
Information Technology Systems
We have fully integrated information technology (“IT”) systems that support critical business functions, such as sales reporting, inventory management and distribution functions and provide pertinent information for financial reporting, as well as robust business intelligence and retail analytics tools. We manage IT solutions for e-commerce, email and networks that connect our employees to appropriate technology solutions and tools. This includes connecting our stores via a managed wide area network connection for purchasing card (i.e., credit and debit card) encryption, tokenization, authorization and processing, as well as providing access to valuable tools such as collaboration, online training, workforce management, online hiring, Company website functions and corporate communications. Our separate disaster recovery facility and solutions provide redundant networks and applications to be used in the event of an emergency or unplanned outage. We believe our IT systems are effectively supporting our current operations and provide a foundation for future growth and new business initiatives.
7
Distribution
We operate a distribution center located in Riverside, California, that services all of our stores. The facility has 953,000 square feet of storage and office space, along with an additional 172,000 square-foot distribution space adjacent to our distribution center that enables us to more efficiently fulfill our expanding distribution requirements. The distribution center warehouse management system is fully integrated with our enterprise-level IT systems and provides comprehensive warehousing and distribution capabilities. We generally distribute merchandise from our distribution center to our stores at least once per week, using our fleet of leased tractors, as well as contract carriers.
Industry and Competition
The retail market for sporting goods is highly competitive. In general, competition tends to fall into the following six basic categories:
Sporting Goods Superstores. Stores in this category typically are larger than 35,000 square feet and tend to be free-standing locations. These stores emphasize high volume sales and a large number of stock-keeping units. Examples include Academy Sports & Outdoors and Dick’s Sporting Goods.
Traditional Sporting Goods Stores. This category consists of traditional sporting goods chains, including us. These stores range in size from 5,000 to 20,000 square feet and are frequently located in regional malls and multi-store shopping centers. The traditional chains typically carry a varied assortment of merchandise and attempt to position themselves as convenient neighborhood stores. Sporting goods retailers operating stores within this category include Hibbett Sports.
Specialty Sporting Goods Stores. Specialty sporting goods retailers are stores that typically carry a wide assortment of one specific product category or brand, such as athletic shoes, golf, or outdoor equipment. Examples of these retailers include Bass Pro Shops, Cabela’s, Foot Locker, Sportsman’s Warehouse and REI. This category also includes pro shops that often are single-store operations.
Mass Merchandisers. This category includes discount retailers such as Walmart and Target and department stores such as JC Penney and Kohl’s. These stores range in size from 50,000 to 200,000 square feet and are primarily located in regional malls, shopping centers or on free-standing sites. Sporting goods merchandise and apparel represent a small portion of the total merchandise in these stores and the selection is often more limited than in other sporting goods retailers.
E-commerce Retailers. This category consists of many retailers that sell a broad array of new and used sporting goods products via e-commerce or catalogs, including Amazon.com. The types of retailers mentioned above may also sell their products through e-commerce. E-commerce has been a rapidly growing sales channel, particularly with younger consumers, and an increasing source of competition in the sporting goods retail industry.
Athletic and Sporting Goods Brands. This category consists of athletic and sporting goods brands that engage in direct-to-consumer sales through traditional retail channels, e-commerce or a combination of both. These brands may also sell their products to us and other competitors. Examples of brands that sell directly to consumers include Nike, adidas and Under Armour.
In competing with the retailers discussed above, we focus on what we believe are the primary factors of competition in the sporting goods retail industry, including breadth, depth, price and quality of merchandise offered; advertising; purchasing and pricing policies; experienced and knowledgeable personnel; customer service; effective sales techniques; direct involvement of senior officers in monitoring store operations; enterprise-level IT systems; and convenience of store location and format.
8
Human Capital
We believe the experience and tenure of our professional staff in the retail industry gives us a competitive advantage. The table below indicates the tenure of our professional staff in some of our key functional areas as of January 3, 2021:
|
|
Number of
Employees
|
|
|
Average
Number of
Years With Us
|
|
Executive Management
|
|
|
9
|
|
|
|
34
|
|
Vice Presidents
|
|
|
7
|
|
|
|
27
|
|
Buyers
|
|
|
23
|
|
|
|
18
|
|
Store District / Regional Supervisors
|
|
|
51
|
|
|
|
24
|
|
Store Managers
|
|
|
425
|
|
|
|
14
|
|
As of January 3, 2021, we had approximately 8,400 active employees, of which approximately 2,400 were full-time. The General Teamsters, Airline, Aerospace and Allied Employees, Warehousemen, Drivers, Construction, Rock and Sand, Local Union No. 986, affiliated with the International Brotherhood of Teamsters (“Local 986”) represents 478 hourly employees in our distribution center and select stores. In December 2017, we negotiated a five-year contract with Local 986 for the covered distribution center employees, and in January 2018, we negotiated a five-year contract with Local 986 for the covered store employees. Both contracts were retroactive to September 1, 2017, and expire on August 31, 2022. We have not had a strike or work stoppage in over 30 years, although such a disruption could have a significant negative impact on our business operations and financial results. We believe we provide working conditions and wages that are comparable to those offered by other retailers in the sporting goods industry and that employee relations are good.
We utilize an automated Learning Management System (“LMS”) and have developed comprehensive training that can be expressly tailored for each store and corporate position. Our LMS allows us to rapidly convey and track the dissemination of important information as it develops, such as product merchandising strategies, policy changes, safety rules, cash handling procedures, systems resolution and utilization, loss prevention updates and inventory control guidelines. All new store employees are assigned introductory LMS learning material as well as provided with a live orientation highlighting basic policies and responsibilities and our expectation that each employee strives to deliver excellence in customer service, product knowledge and salesmanship. New full-time store salespeople, cashiers and manager trainees receive supplementary training and evaluations specific to their job responsibilities and their ongoing development. The versatility of the LMS provides us with the ability to track and monitor many different types of training and the flexibility we need to deliver our message to widely dispersed personnel within the structure of our on-the-go work environment. Our employee training programs include self-directed online courses, live webinars, production of soft and hard copy reference materials, one-on-one training, hands-on training and progressive developmental training. In the stores, manager trainees are expected to complete a progressive series of outlines and evaluations in order to be considered for each successive level of advancement. Experienced store management training includes advanced merchandising, delegation, personnel management, scheduling, payroll control, harassment and discrimination prevention and loss prevention. Our overall training strategy and LMS enable us to efficiently manage, monitor, assign and report employee training results online and in real time.
Description of Service Marks and Trademarks
We use the “Big 5” and “Big 5 Sporting Goods” names as service marks in connection with our business operations and have registered these names as federal service marks. The renewal dates for these service mark registrations are in 2025 and 2023, respectively. We have also registered the names Golden Bear, Harsh, Pacifica and Rugged Exposure as federal trademarks under which we sell a variety of merchandise. The renewal dates for these trademark registrations range from 2026 to 2028. We intend to renew these service mark and trademark registrations if we are still using the marks in commerce and they continue to provide value to us at the time of renewal.
9
ITEM 1A.RISK FACTORS
An investment in the Company entails risks and uncertainties including the following. You should carefully consider these risk factors when evaluating any investment in the Company. Any of these risks and uncertainties could cause our actual results to differ materially from the results contemplated by the forward-looking statements set forth herein, and could otherwise have a significant adverse impact on our business, prospects, financial condition or results of operations or on the price of our common stock.
Risks Related to Our Business and Industry
Intense competition in the sporting goods industry could limit our growth and reduce our profitability.
The retail market for sporting goods is highly fragmented and intensely competitive. We compete directly or indirectly with the following categories of companies, through traditional retail and e-commerce channels:
|
•
|
sporting goods superstores, such as Academy Sports & Outdoors and Dick’s Sporting Goods;
|
|
•
|
traditional sporting goods stores and chains, such as Hibbett Sports;
|
|
•
|
specialty sporting goods shops and pro shops, such as Bass Pro Shops, Cabela’s, Foot Locker, Sportsman’s Warehouse and REI;
|
|
•
|
mass merchandisers, discount stores and department stores, such as Walmart, Target, Kohl’s and JC Penney;
|
|
•
|
e-commerce retailers, such as Amazon.com; and
|
|
•
|
athletic and sporting goods brands that engage in direct-to-consumer sales, such as Nike, adidas and Under Armour.
|
Some of our competitors have a larger number of stores, greater e-commerce capabilities or greater financial, distribution, marketing and other resources than we have. If our competitors reduce their prices, it may be difficult for us to retain market share without reducing our prices, which could impact our margins. As a result of this competition, we may also need to spend more on advertising and promotion than we anticipate. Increased competition in our current markets or the adoption or proliferation by competitors of innovative store formats, aggressive pricing strategies and retail sales methods, such as e-commerce, could cause us to lose market share and could have a material adverse effect on our business.
While e-commerce has been a rapidly growing sales channel and an increasing source of competition in the retail industry, sales from our e-commerce channel are not material to our operations. We have no assurance that our e-commerce efforts will prove profitable, whether due to product preferences of online buyers, ability to compete with other (often more established) online retailers, or for other reasons, such as the cannibalization of sales from our existing store base. If we are unable to compete successfully, our operating results may suffer.
If we fail to anticipate changes in consumer preferences, we may experience lower net sales, higher inventory, higher inventory markdowns and lower margins.
Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty. These preferences are also subject to change and can be impacted by various factors, including sports participation levels in our market areas, the performance of sports teams for which we sell licensed products, weather conditions in our market areas and regulatory or political changes. During the novel coronavirus (“COVID-19”) pandemic, our product offerings have resonated with consumers who are looking for ways to stay healthy and active to fulfill their fitness and outdoor recreational needs. Our success depends upon our ability to anticipate and respond in a timely manner to consumer trends and consumers’ participation in sports and other recreational activities for which we sell products. If we fail to identify and respond in a timely manner to these changes, our net sales and profitability may decline. In addition, because we often make commitments to purchase products from our vendors up to nine months in advance of the proposed delivery, if we misjudge the market for our merchandise or conditions change after we have committed to purchase products, we may overstock unpopular products and be forced to take inventory markdowns that could have a negative impact on profitability.
If we are unable to effectively and efficiently connect with our customers through our advertising and marketing programs, our operating results may suffer.
We historically utilized print advertising programs that included newspaper inserts, direct mailers and courier-delivered inserts in order to effectively deliver our message to our targeted markets. Newspaper circulation and readership has been declining, and in recent years we have been shifting more of our advertising from print to digital. In 2020, in response to the COVID-19 pandemic, we accelerated the reduction of our print advertising programs. The consumer preferences for certain of our product categories that have driven positive sales during the COVID-19 outbreak may not continue after the outbreak has subsided, and we may need to increase advertising and promotional activity from the current historically low levels in an effort to drive customer traffic and sales, which could impact our profitability. If our efforts to evolve our advertising programs fail or we are unable to develop other effective strategies to reach potential customers within our desired markets, awareness of our stores, products and promotions could decline and our net sales could suffer.
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The COVID-19 pandemic has disrupted and is expected to continue to disrupt our business, which could have a material adverse impact on our business, results of operations, liquidity and financial condition for an extended period of time.
During March 2020, the World Health Organization declared the rapidly growing COVID-19 outbreak to be a global pandemic. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine. Beginning on March 20, 2020, we temporarily closed more than one-half of our retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. We were subsequently able to gradually reopen all of our store locations based on either qualifying as an “essential” business under applicable regulations or as a result of the easing of regulatory restrictions on retail operations in our market areas. New temporary closures of stores may be required if additional orders are issued in response to changing health conditions. We have implemented reduced store hours, limited the number of customers in our stores at any one time and have generally implemented social-distancing guidelines throughout our store operating space. As a result of the reduced customer traffic and sales at the start of the pandemic, and in an effort to preserve capital, we implemented temporary and permanent workforce reductions throughout the Company, reduced advertising and planned capital spending in fiscal 2020 and suspended our quarterly dividend payment. We may further restrict the operations of our stores and our distribution facility if we deem this necessary or if recommended or mandated by authorities.
As mentioned above, our store locations were considered an “essential” business under applicable regulations in many of the markets in which we operate. In addition, the states and local jurisdictions in which we operate have begun to ease the regulatory restrictions on retail operations that had been put in place with the shelter orders and, as of January 3, 2021 all of our stores that were temporarily closed due to COVID-19 had reopened for in-store shopping, subject to appropriate social distancing restrictions and with reduced operating hours. As our stores have reopened, our sales have benefited from increased consumer demand for certain product categories as a result of the COVID-19 pandemic, including fitness, firearm-related products and outdoor recreation. Additionally, our store operating hours and advertising and promotional activity have been reduced as a result of COVID-19, which has resulted in lower expense and higher profitability.
If the classification of what is an “essential” business changes in jurisdictions where our stores are located, or the restrictions on retail operations in our markets are reinstituted, or other government regulations are adopted pertaining to how we may operate our stores, we may be required to temporarily close or restrict operations at more, if not all, of our stores, which would significantly impact our sales and results of operations. Also, if we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate for a particular region or our company as a whole, we could suffer damage to our reputation and our brand, which could adversely affect our business in the future.
COVID-19 has also impacted our supply chain for products we sell, particularly those products that are sourced from China. To the extent one or more of our vendors is negatively impacted by COVID-19, including due to the closure of its distribution centers or manufacturing facilities, we may be unable to maintain delivery schedules or adequate inventory in our stores.
The extent to which the COVID-19 outbreak impacts our business, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity and impact of the COVID-19 outbreak, the effects of the outbreak on our customers, employees and vendors, the regulatory response and impact of stimulus measures adopted by local, state and federal governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we could experience materially adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future due to a continued erosion in consumer sentiment or the effect of high unemployment on our consumer base. Additionally, the consumer preferences for certain product categories that have driven positive sales during the COVID-19 outbreak may not continue after the outbreak has subsided, and any change in consumer preferences could negatively impact our results of operations. We may need to increase advertising and promotional activity from the current historically low levels in an effort to drive customer traffic and sales, which could impact our profitability. As business conditions evolve, we may need to increase our staffing from the current reduced levels, which could impact profitability. Furthermore, the financial condition of our customers and vendors may be adversely impacted by the pandemic, which may result in a decrease in discretionary consumer spending and our store traffic and sales, and an increase in bankruptcies or insolvencies with respect to our vendors. These events may, in turn, have a material adverse impact on our business, results of operations, liquidity and financial condition. In the event of a prolonged material economic downturn, including circumstances that require us to close a large portion of our stores or cause us to experience a further reduction in store traffic, we may not be able to comply with the financial covenants in our credit facility, which could negatively impact our ability to borrow under that facility or with other lenders, negatively impact our liquidity position and may increase our risk of insolvency.
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Because our stores are concentrated in the western United States, we are subject to regional risks.
Our stores are located in the western United States. Because of this, we are subject to regional risks, such as the economy, including downturns in the housing market, state financial conditions, unemployment and gas prices. Other regional risks include adverse weather and climate conditions, power outages, earthquakes and other natural disasters specific to the states in which we operate. For example, particularly in California where we have a high concentration of stores, seasonal factors such as unfavorable weather conditions or other localized conditions such as flooding, drought, fires (such as the wildfires of 2018 that destroyed our store located in Paradise, CA), earthquakes or electricity blackouts (such as the rolling blackouts of 2019 that impacted certain California stores) could impact our sales and harm our operations. State and local regulatory compliance, such as with recent minimum wage increases in our market areas, also can impact our financial results. Economic downturns or other adverse regional events could have an adverse impact upon our net sales and profitability and our ability to open additional stores in the manner that we have in the past.
Additionally, California is subject to a property tax law commonly referred to as Proposition 13, which allows properties to be reassessed only at the time of change in ownership or completion of construction, and annual property reassessments are limited to a 2% increase from previously-assessed values thereafter. As a result, Proposition 13 generally results in significant below-market assessed values over time. From time to time, and recently, lawmakers and political coalitions have initiated efforts to repeal or amend Proposition 13 to eliminate its application to commercial and industrial properties. Since we lease all of our store locations, as well as our corporate offices and distribution center facilities in California, and are required under the terms of our leases to pay property taxes thereon, any repeal of Proposition 13 could substantially increase the assessed values and property taxes we pay for our leased properties in California.
A significant amount of our sales is impacted by seasonal weather conditions in our markets.
Because many of the products we sell are used for seasonal outdoor sporting and recreational activities, our business is significantly impacted by weather and climate conditions in our markets. For example, our winter sports and apparel sales are dependent on cold winter weather and snowfall in our markets and can be negatively impacted by unseasonably warm or dry weather in our markets during the winter product selling season. Conversely, sales of our spring products and summer products, such as baseball gear and camping and water sports equipment, can be adversely impacted by unseasonably cold or wet weather in those periods. Accordingly, our sales results and financial condition will typically suffer when weather and climate patterns do not conform to seasonal norms.
Our business is subject to seasonal fluctuations, and unanticipated changes in our customers’ seasonal buying patterns can impact our business.
We experience seasonal fluctuations in our net sales and operating results. Seasonality 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, our net sales can decline, which can harm our financial performance. A significant shortfall from expected net sales can negatively impact our annual operating results.
All of our stores rely on a single distribution center. Any disruption or other operational difficulties at this distribution center could reduce our net sales or increase our operating expense.
We rely on a single distribution center facility located in Riverside, California to service our business. Any natural disaster or other serious disruption to the distribution center due to fire, earthquake or any other cause could damage a significant portion of our inventory and could materially impair both our ability to adequately stock our stores and our net sales and profitability. If the security measures used at our distribution center do not prevent inventory theft, our gross profit may significantly decrease. Our distribution center is staffed in part by employees represented by Local 986. We have not had a strike or work stoppage in over 30 years, although such a disruption could have a significant negative impact on our business operations and financial results. Further, in the event that we are unable to grow our net sales sufficiently to allow us to leverage the costs of this distribution center in the manner we anticipate, our financial results could be negatively impacted.
Additionally, because we rely on a single distribution center, our store growth could be limited to the geographic areas to which we can efficiently distribute products from this facility. Our store growth also could be limited if our distribution center reaches full capacity. Such constraints could result in a loss of market share and our inability to execute our business plan, which could have a material adverse effect on our financial condition and results of operations.
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If we are unable to successfully implement our controlled growth strategy or manage our growing business, our future operating results could suffer.
One of our strategies includes opening profitable stores in new and existing markets. Our ability to successfully implement and capitalize on our growth strategy could be negatively affected by various factors including:
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we may slow our expansion efforts, or close underperforming stores, as a result of challenging conditions in the retail industry and the economy overall;
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we may not be able to find suitable sites available for leasing within our existing market areas, and our distribution capabilities may limit our ability to expand beyond our current market areas;
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we may not be able to negotiate acceptable lease terms;
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we may not be able to hire and retain qualified store personnel; and
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we may not have the financial resources necessary to fund our expansion plans.
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In recent years, we have slowed our store openings and strategically closed certain stores as we maintained a cautious approach toward store expansion in the current retail environment, which included the liquidation and closure of certain major competitors in our markets in fiscal 2016, increasing e-commerce competition and the COVID-19 pandemic in fiscal 2020. If we are unable to resume our store expansion efforts for any of the reasons discussed above, our operating results could suffer.
In addition, our expansion in new and existing markets may present competitive, merchandising, marketing and distribution challenges that differ from our current challenges. These potential new challenges include competition among our stores, added strain on our distribution center, additional information to be processed by our information technology (“IT”) systems, diversion of management attention from ongoing operations and challenges associated with managing a larger enterprise. We face additional challenges in entering new markets, including consumers’ lack of awareness of us, difficulties in hiring personnel and problems due to our unfamiliarity with local real estate markets and demographics. New markets may also have different competitive conditions, consumer tastes, responsiveness to print advertising and discretionary spending patterns than our existing markets. To the extent that we are not able to meet these new challenges, our net sales could decrease and our operating expense could increase.
If our suppliers do not provide sufficient quantities of products, our net sales and profitability could suffer.
We purchase merchandise from over 680 vendors. Although only one vendor represented more than 5.0% of our total purchases during fiscal 2020, our dependence on principal suppliers involves risk. Our 20 largest vendors collectively accounted for 36.4% of our total purchases during fiscal 2020. If there is a disruption in supply from a principal supplier or distributor, we may be unable to obtain merchandise that we desire to sell and that consumers desire to purchase. A vendor could discontinue or restrict selling products to us at any time for reasons that may or may not be within our control. In recent years, athletic and sporting goods brands have been increasingly developing the direct-to-consumer segments of their businesses, and this shift could result in restrictions on the products available for us to purchase and sell. Our net sales and profitability could decline if we are unable to promptly replace a product vendor who is unwilling or unable to satisfy our requirements with a vendor providing equally appealing products. Moreover, many of our suppliers provide us with incentives, such as return privileges, volume purchase allowances and co-operative advertising. A decline or discontinuation of these incentives could reduce our profits.
Because many of the products that we sell are manufactured abroad, we may face delays, increased cost or quality control deficiencies in the importation of these products, which could reduce our net sales and profitability.
Like many other sporting goods retailers, a significant portion of the products that we purchase for resale, including those purchased from domestic suppliers, is manufactured abroad in China and other countries. In addition, we believe most, if not all, of our private label merchandise is manufactured abroad. Foreign imports subject us to the risks of changes in, or the imposition of new, import tariffs, duties or quotas, new restrictions on imports, loss of “most favored nation” status with the United States for a particular foreign country, antidumping or countervailing duty orders, retaliatory actions in response to illegal trade practices, work stoppages, delays in shipment, freight expense increases, product cost increases due to foreign currency fluctuations or revaluations, public health issues that could lead to temporary closures of or delays at facilities or shipping ports, such as the COVID-19 pandemic, and other economic uncertainties. If any of these or other factors were to cause a disruption of trade from the countries in which the suppliers of our vendors are located or impose additional costs in connection with the purchase of our products, we may be unable to obtain sufficient quantities of products to satisfy our requirements and our results of operations could be adversely affected.
To the extent that any foreign manufacturers which supply products to us directly or indirectly utilize quality control standards, labor practices or other practices that vary from those legally mandated or commonly accepted in the United States, we could be hurt by any resulting negative publicity or increases in operating costs or, in some cases, face potential liability.
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In addition, instability in the political and economic environments of the countries in which our vendors or we obtain our products, or general international instability, could have an adverse effect on our operations. In the event of disruptions or delays in supply due to economic or political conditions in foreign countries, such disruptions or delays could adversely affect our results of operations unless and until alternative supply arrangements could be made. In addition, merchandise purchased from alternative sources may be of lesser quality or more expensive than the merchandise we currently purchase abroad.
Disruptions in transportation, including disruptions at shipping ports through which our products are imported, could prevent us from timely distribution and delivery of inventory, which could reduce our net sales and profitability.
A substantial amount of our inventory is manufactured abroad. From time to time, shipping ports experience capacity constraints, labor strikes, work stoppages or other disruptions that may delay the delivery of imported products. A contract dispute at the ports through which our products travel, particularly the Ports of Los Angeles and Long Beach, could lead to protracted delays in the movement of our products, which could further delay the delivery of products to our stores and impact net sales and profitability. In addition, other conditions outside of our control, such as adverse weather conditions, acts of terrorism or public health issues that could lead to temporary closures of or delays at facilities or shipping ports, such as the COVID-19 pandemic, could significantly disrupt operations at shipping ports or otherwise impact transportation of the imported merchandise we sell.
Future disruptions in transportation services or at a shipping port at which our products are received may result in delays in the transportation of such products to our distribution center and may ultimately delay the stocking of our stores with the affected merchandise. As a result, our net sales and profitability could decline.
Our costs may change as a result of currency exchange rate fluctuations or inflation in the purchase cost of merchandise manufactured abroad.
We and our suppliers source goods from various countries, including China, and thus changes in the value of the U.S. dollar compared to other currencies, or foreign labor and raw material cost inflation, may affect the cost of goods that we purchase. If the cost of goods that we purchase increases, we may not be able to similarly increase the retail prices of goods that we charge consumers without impacting our sales and our operating profits may suffer.
Increases in transportation costs due to rising fuel costs, climate change regulation and other factors may negatively impact our operating results.
We rely upon various means of transportation, including ship and truck, to deliver products from vendors to our distribution center and from our distribution center to our stores. Consequently, our results can vary depending upon the price of fuel. The price of oil has fluctuated drastically over the last few years, creating volatility in our fuel costs. In addition, efforts to combat climate change through reduction of greenhouse gases may result in higher fuel costs through taxation or other means. Any such future increases in fuel costs would increase our transportation costs for delivery of product to our distribution center and distribution to our stores, as well as our vendors’ transportation costs, which could decrease our operating profits.
In addition, labor shortages or other factors in the transportation industry could negatively affect transportation costs and our ability to supply our stores in a timely manner. In particular, our business is highly dependent on the trucking industry to deliver products to our distribution center and our stores. Our operating results may be adversely affected if we or our vendors are unable to secure adequate trucking resources at competitive prices to fulfill our delivery schedules to our distribution center or stores.
Risks Related to Our Capital Structure
Our future cash flows may not be sufficient to meet our obligations and we might have difficulty obtaining more financing or refinancing any existing indebtedness on favorable terms.
As of January 3, 2021, the amount of our long-term revolving credit borrowings outstanding was zero. However, we have historically maintained a leveraged financial position. This means:
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our ability to obtain financing in the future for working capital, capital expenditures and general corporate purposes might be impeded;
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we are more vulnerable to economic downturns and our ability to withstand competitive pressures is limited; and
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we are more vulnerable to increases in interest rates, which may affect our interest expense and negatively impact our operating results.
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If our business declines, our future cash flows might not be sufficient to meet our obligations and commitments.
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If we fail to make any required payment under our revolving credit facility, our debt payments may be accelerated under this agreement. In addition, in the event of bankruptcy, insolvency or a material breach of any covenant contained in our revolving credit facility, our debt may be accelerated. This acceleration could also result in the acceleration of other indebtedness that we may have outstanding at that time.
The level of our indebtedness, and our ability to service our indebtedness, is directly affected by our cash flows from operations. If we are unable to generate sufficient cash flows from operations to meet our obligations, commitments and covenants of our revolving credit facility, we may be required to refinance or restructure our indebtedness, raise additional debt or equity capital, sell material assets or operations, delay or forego expansion opportunities, or cease or curtail our quarterly dividends or share repurchase plans. These alternative strategies might not be effected on satisfactory terms, if at all.
The terms of our revolving credit facility impose operating and financial restrictions on us, which may impair our ability to respond to changing business and economic conditions.
The terms of our revolving credit facility impose operating and financial restrictions on us, including, among other things, covenants that require us to maintain a fixed-charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances, restrictions on our ability to 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. For example, our ability to engage in the foregoing transactions will depend upon, among other things, our level of indebtedness at the time of the proposed transaction and whether we are in default under our revolving credit facility. As a result, our ability to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might further our growth strategy or otherwise benefit us and our stockholders without obtaining consent from our lenders. In addition, our revolving credit facility is secured by a perfected security interest in our assets. In the event of our insolvency, liquidation, dissolution or reorganization, the lenders under our revolving credit facility would be entitled to payment in full from our assets before distributions, if any, were made to our stockholders.
Disruptions in the economy and financial markets may adversely impact our lenders.
Volatility in capital and credit markets can impact the ability of financial institutions to meet their lending obligations. Based on information available to us, the lender under our revolving credit facility is currently able to fulfill its commitments thereunder. However, circumstances could arise that may impact its ability to fund its obligations in the future. Although we believe the commitments from our lenders under the revolving credit facility, together with our cash on hand and anticipated operating cash flows, should be sufficient to meet our near-term borrowing requirements, if Bank of America, National Association, our lender, or any other lender under the credit facility from time to time, is for any reason unable to perform its lending or administrative commitments under the facility, then disruptions to our business could result and may require us to replace this facility with a new facility or to raise capital from alternative sources on less favorable terms, including higher rates of interest.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR may increase our interest expense and adversely affect our results of operations.
On July 27, 2017, the UK’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, announced replacement of U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain, which may impact the interest charged under our existing revolving credit facility. Our credit facility provides that in the event LIBOR rates are no longer available, we and our lenders will work in good faith to adopt a replacement benchmark rate and an applicable margin for borrowings based on such replacement benchmark rate. We may incur increased interest expense using any such replacement benchmark rate or, if such a rate cannot be agreed upon between us and our lenders, the base rate for all borrowings under our credit facility, which could have an adverse effect on our results of operations.
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Risks Related to Regulatory, Legislative and Legal Matters
Current and future government regulation may negatively impact demand for our products and increase our cost of conducting business.
The conduct of our business, and the distribution, sale, advertising, labeling, safety, transportation and use of many of our products are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as regulations administered by various youth sports leagues and organizations. These laws and regulations may change, sometimes dramatically, as a result of political, economic or social events, such as the state and local stay-at-home orders issued in our markets in response to the COVID-19 pandemic. Changes in laws, regulations or governmental policy may alter the environment in which we do business and the demand for our products and, therefore, may impact our financial results or increase our liabilities. Some of these laws and regulations include:
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laws and regulations governing how our stores may operate during the COVID-19 pandemic;
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laws and regulations governing the manner in which we advertise or sell our products;
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laws and regulations that prohibit or limit the sale, in certain localities, of certain products we offer, such as firearm-related products;
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laws and regulations governing the activities for which we sell products, such as hunting and fishing;
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laws and regulations governing consumer products generally, such as the federal Consumer Product Safety Act and Consumer Product Safety Improvement Act, as well as similar state laws;
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labor and employment laws, such as minimum wage or living wage laws, paid time off and other wage and hour laws;
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laws requiring mandatory health insurance for employees, such as the Affordable Care Act;
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U.S. customs laws and regulations pertaining to duties and tariffs, including proper item classification, quotas and payment of duties and tariffs; and
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laws and regulations governing consumer privacy, such as the California Consumer Privacy Act.
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Changes in these and other laws and regulations or additional regulation could cause the demand for and sales of our products to decrease. Moreover, complying with increased or changed regulations could cause our cost of obtaining products and our operating expense to increase. This could adversely affect our net sales and profitability.
We may be subject to periodic litigation that may adversely affect our business and financial performance.
From time to time, we may be involved in lawsuits and regulatory actions relating to our business, certain of which may be maintained in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business, results of operations and financial condition. In addition, regardless of the outcome of any litigation or regulatory proceedings, these proceedings could result in substantial costs and may require that we devote substantial resources to defend against these claims, which could impact our results of operations.
In particular, we may be involved in lawsuits related to employment, advertising and other matters, including class action lawsuits brought against us for alleged violations of the Fair Labor Standards Act, state wage and hour laws, state or federal advertising laws and other laws. An unfavorable outcome or settlement in any such proceeding could, in addition to requiring us to pay any settlement or judgment amount, increase our operating expense as a consequence of any resulting changes we might be required to make in employment, advertising or other business practices.
In addition, we sell products manufactured by third parties, some of which may be defective. Many such products are manufactured overseas in countries which may utilize quality control standards that vary from those legally allowed or commonly accepted in the United States, which may increase our risk that such products may be defective. If any products that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the retailer of the products based upon strict product liability. In addition, our products are subject to the federal Consumer Product Safety Act and the Consumer Product Safety Improvement Act, which empower the Consumer Product Safety Commission to protect consumers from hazardous products. The Consumer Product Safety Commission has the authority to exclude from the market and recall certain consumer products that are found to be hazardous. Similar laws exist in some states and cities in the United States. If we fail to comply with government and industry safety standards or reporting requirements, we may be subject to claims, lawsuits, product recalls, fines and negative publicity that could harm our results of operations and financial condition.
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We also sell firearm-related products, which may be associated with an increased risk of injury and related lawsuits. We may incur losses due to lawsuits relating to our performance of background checks in connection with firearms or ammunition purchases as mandated by state and federal law or the improper use of firearms sold by us, including lawsuits by individuals, municipalities or other organizations attempting to recover damages or costs from firearms manufacturers and retailers relating to the misuse or release of firearms. Commencement of these lawsuits against us could reduce our net sales and decrease our profitability. The sale of firearm-related products also may present reputational risks and negative publicity that could affect consumers’ perception of us or willingness to shop with us, which could harm our results of operations and financial condition.
The insurance coverage under policies that we maintain or that our product vendors maintain and under which we may be insured may not be adequate to cover claims that could be asserted against us. If a successful claim was to be brought against us in excess of our insurance coverage, or for which we have no insurance coverage, it could harm our business. Even unsuccessful claims could result in the expenditure of substantial funds and management time and could have a negative impact on our business. In addition, the cost of maintaining adequate insurance coverage could increase based on claims asserted against us, the type of products that we sell and market conditions generally.
The sale of firearm-related products is subject to strict regulation, which could affect our operating results.
Because we sell firearm-related products, we are required to comply with federal, state and local laws and regulations pertaining to the purchase, storage, transfer and sale of such products. These laws and regulations require us to, among other things, obtain and maintain federal, state or local permits or licenses in order to sell firearms or ammunition, ensure that certain employees obtain licenses to sell firearms or ammunition, ensure that all purchasers of firearms are subjected to a pre-sale background check and other requirements, record the details of each firearm sale on appropriate government-issued forms, record each receipt or transfer of a firearm at our distribution center or any store location on acquisition and disposition records, and maintain these records for a specified period of time. Additionally, in certain jurisdictions we are required to obtain a license to sell ammunition or record the details of each ammunition sale and maintain these records for a specified period of time. We also are required to timely respond to traces of firearms by law enforcement agencies. Over the past several years, the purchase and sale of firearm-related products has been the subject of increased federal, state and local regulation, such as recently enacted requirements related to performing a safe-handling demonstration of firearms in California, new minimum age restriction laws and ammunition sales laws. These regulatory efforts are likely to continue in our current markets and other markets into which we may expand. If enacted, new laws and regulations could limit the types of firearm-related products that we are permitted to purchase and sell, impose new restrictions and requirements on the manner in which we purchase, sell and store these products, increase regulatory fees charged to the consumer and impact our ability to offer these products in certain retail locations or markets. If we fail to comply with existing or newly enacted laws and regulations relating to the purchase and sale of firearm-related products, our permits or licenses to sell firearm-related products at our stores or maintain inventory of firearm-related products at our distribution center may be suspended or revoked. If this occurs, our net sales and profitability could suffer. Further, complying with increased regulation relating to the sale of firearm-related products could cause our operating expense to increase and this could adversely affect our results of operations.
Risks Related to Investing in Our Common Stock
The declaration of discretionary dividend payments or the repurchase of our common stock pursuant to our share repurchase program may not continue.
We currently pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of us and our stockholders. Our dividend policy may be affected by, among other items, business conditions, our financial condition, our views on potential future capital requirements, the terms of our debt instruments, legal risks, changes in federal income tax law and challenges to our business model. In early fiscal 2020, we suspended dividend payments in an effort to preserve capital in response to the initial impact of the COVID-19 pandemic. While we have since reinstated and increased our dividend, our dividend policy may change from time to time and we may or may not continue to declare discretionary dividend payments. Additionally, although we have a share repurchase program authorized by our Board of Directors, we are not obligated to make any purchases under the program and we may reduce the amount of purchases we make under the program or discontinue the program at any time.
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Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change of control would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our Company, even if such change in control would be beneficial to our stockholders. The provisions of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law that could discourage, delay or prevent a merger, acquisition or other change in control include:
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a Board of Directors that is classified such that two or three of the seven directors, depending on classification, are elected each year and each director is elected for a three-year term;
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limitations on the ability of stockholders to call special meetings of stockholders;
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prohibition of stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders;
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a requirement in our certificate of incorporation that stockholder amendments to our bylaws and certain amendments to our certificate of incorporation must be approved by 80% of the outstanding shares of our capital stock;
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•
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authorization of the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt; and
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|
•
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establishment of advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
|
In addition, Section 203 of the Delaware General Corporations Law limits business combination transactions with 15% stockholders that have not been approved by the Board of Directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the transaction may be considered beneficial by some stockholders.
General Risk Factors
Disruptions in the overall economy and the financial markets may adversely impact our business and results of operations.
The retail industry can be greatly affected by macroeconomic factors, including changes in national, regional and local economic conditions, as well as consumers’ perceptions of such economic factors. In general, sales represent discretionary spending by our customers. Discretionary spending is affected by many factors, including general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, gasoline prices, income, unemployment trends, home values and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. We have experienced in the past, and may continue to experience, increased inflationary pressure on our product costs. Our customers’ purchases of discretionary items, including our products, generally decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. Deterioration of the consumer spending environment could be harmful to our financial position and results of operations, could adversely affect our ability to comply with covenants under our credit facility and, as a result, may negatively impact our ability to continue payment of our quarterly dividend, to repurchase our stock and to open additional stores in the manner that we have in the past.
Our quarterly net sales and operating results, reported and expected, can fluctuate substantially, which may adversely affect the market price of our common stock.
Our net and same store sales and results of operations, reported and expected, have fluctuated in the past and will vary from quarter to quarter in the future. These fluctuations may adversely affect our financial condition and the market price of our common stock. A number of factors, many of which are outside our control, have historically caused and will continue to cause variations in our quarterly net and same store sales and operating results, including changes in consumer demand for our products, competition in our markets, inflation, increases in operating expense, changes in pricing or other actions taken by our competitors, weather conditions in our markets, natural disasters, litigation, political events, government regulation, changes in accounting standards, changes in management’s accounting estimates or assumptions and economic conditions, including those specific to our western United States markets.
18
If we lose key management or are unable to attract and retain the talent required for our business, our operating results could suffer.
Our future success depends to a significant degree on the skills, experience and efforts of Steven G. Miller, our Chairman, President and Chief Executive Officer, and other key personnel with longstanding tenure who are not obligated to stay with us. The loss of the services of any of these individuals for any reason could harm our business and operations. In addition, as our business grows, we will need to attract and retain additional qualified personnel in a timely manner and develop, train and manage an increasing number of management-level sales associates and other employees. Competition for qualified employees and increases in the cost of living in our market areas could require us to pay higher wages and benefits to attract a sufficient number of qualified employees, and increases in the minimum wage or other employee benefit costs could increase our operating expense. If we are unable to attract and retain personnel as needed in the future, our net sales growth and operating results may suffer.
Our information technology systems are critical to the functioning of our business and are vulnerable to failure, damage, theft or intrusion that could harm our operations.
Our success, in particular our ability to successfully manage inventory levels and process customer transactions, largely depends upon the efficient operation of our IT systems. We use IT systems to track inventory at the store level and aggregate daily sales information, communicate customer information and process purchasing card transactions, process shipments of goods and report financial information. These systems and our operations are vulnerable to damage or interruption from:
|
•
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earthquake, fire, flood and other natural disasters;
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|
•
|
failed system implementations;
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|
•
|
power loss, computer systems failures, Internet and telecommunications or data network failures, third-party vendor system failures, operator negligence, improper operation by or supervision of employees;
|
|
•
|
physical and electronic loss of data, security breaches, misappropriation, data theft and similar events; and
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|
•
|
computer viruses, worms, Trojan horses, intrusions, or other external threats.
|
Any failure of our IT systems that causes an interruption in our operations, loss of data, or a decrease in inventory tracking could result in reduced net sales and profitability. Additionally, if any data intrusion, security breach, misappropriation or theft were to occur, we could incur significant costs in responding to such event, including responding to any resulting claims, litigation or investigations, which could harm our operating results.
Breach of data security or other unauthorized disclosure of sensitive or confidential information could harm our business, employees and standing with our customers.
The protection of our customer, employee and business data is critical to us. Our business, like that of most retailers, involves the receipt, storage and transmission of customers’ personal information, consumer preferences and payment card information, as well as confidential information about our employees, our suppliers and our Company. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of all such data, including confidential information. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, data theft, misplaced or lost data, programming or human errors, or other similar events. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means, including deceiving our employees or third-party service providers. The methods used to obtain unauthorized access, disable or degrade service, or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. We have implemented and regularly review and update our control systems, processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever-evolving threats mean we must continually evaluate and adapt our systems and processes, and there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. Any security breach involving the misappropriation, loss or other unauthorized disclosure of customer payment card or personal information or employee personal or confidential information, whether by us or our vendors, could damage our reputation, expose us to risk of regulatory enforcement, litigation and liability, disrupt our operations, harm our business and have an adverse impact upon our net sales and profitability. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
19
Terrorism and the uncertainty of war may harm our operating results.
Terrorist attacks or acts of war may cause damage or disruption to us and our employees, facilities, information systems, vendors and customers, which could significantly impact our net sales, profitability and financial condition. Terrorist attacks could also have a significant impact on ports or international shipping on which we are substantially dependent for the supply of much of the merchandise we sell. Our corporate headquarters is located near Los Angeles International Airport and the Port of Los Angeles, which have been identified as potential terrorism targets. The potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility may cause greater uncertainty and cause our business to suffer in ways that we cannot currently predict. Military action taken in response to such attacks could also have a short or long-term negative economic impact upon the financial markets, international shipping and our business in general.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
Accounting principles generally accepted in the United States of America and related accounting standards, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition; income taxes; 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 card breakage and the valuation of share-based compensation awards; and obligations related to litigation, self-insurance liabilities and employee benefits are highly complex and may involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.
Significant stockholders or potential stockholders may attempt to effect changes or acquire control over our Company, which could adversely affect our results of operations and financial condition.
Stockholders may from time to time attempt to effect changes, engage in proxy solicitations or advance stockholder proposals. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of our Board of Directors and senior management from the pursuit of business strategies. As a result, stockholder campaigns could adversely affect our results of operations and financial condition.
Our common stock may be delisted from the NASDAQ Stock Market LLC (“NASDAQ”) if we are unable to maintain compliance with NASDAQ’s continued listing standards.
NASDAQ imposes, among other requirements, continued listing standards including minimum bid and public float requirements. If our stock trades at bid prices of less than $1.00 for a period in excess of 30 consecutive business days, NASDAQ could send a deficiency notice to us for not remaining in compliance with the minimum bid listing standards. If we fail to meet this or any other applicable requirement of NASDAQ and are unable to regain compliance, NASDAQ may make a determination to delist our common stock.
Any delisting of our common stock could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease. Furthermore, if our common stock were delisted it could adversely affect our ability to obtain financing for the continuation of our operations and/or result in the loss of confidence by investors, customers, suppliers and employees.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
20
Properties
Our primary corporate headquarters are located at 2525 East El Segundo Boulevard, El Segundo, California 90245, with a satellite office located nearby at 2401 East El Segundo Boulevard, El Segundo, California 90245. We lease 55,000 square feet of office and adjoining retail space related to our primary corporate headquarters, and we lease 11,500 square feet related to our satellite office. The lease for the primary corporate headquarters is scheduled to expire on February 28, 2026 and provides us with one five-year renewal option, while the lease for the satellite office is scheduled to expire on February 28, 2026 and provides us with no remaining options.
We own a parcel of land with an existing building adjacent to our corporate headquarters location. We currently lease a portion of the parcel of land, including the building, to a restaurant retailer. The lease is scheduled to expire on February 28, 2030, or earlier by providing the lessee with a one-year written notice. The remaining portion of the parcel of land includes a parking lot that we currently use for our corporate headquarters.
Our distribution facility is located in Riverside, California and has 953,000 square feet of warehouse and office space. Our lease for the distribution center is scheduled to expire on August 31, 2025 and includes one additional five-year renewal option. We lease 172,000 square feet of additional distribution space adjacent to our distribution center in Riverside, California that enables us to more efficiently fulfill our expanding distribution requirements. Our lease for this additional facility is scheduled to expire on August 31, 2025 and includes three additional five-year renewal options.
We lease all of our retail store sites. Most of our store leases contain multiple fixed-price renewal options having a typical duration of five years per option. As of January 3, 2021, of our total store leases, 57 leases are due to expire in the next five years without renewal options. In most cases, as current leases expire, we believe we will be able to obtain lease renewals for existing store locations or new leases for substantially equivalent locations in the same general area.
Our Stores
Throughout our history, we have focused on operating traditional, full-line sporting goods stores. Our stores generally range from 8,000 to 15,000 square feet and average approximately 11,000 square feet. Our typical store is located in either a free-standing street location or a multi-store shopping center. Our numerous convenient locations and accessible store format encourage frequent customer visits, resulting in approximately 22.6 million sales transactions and an average transaction size of approximately $46 in fiscal 2020. The following table details our store locations by state as of January 3, 2021:
State
|
|
Year
Entered
|
|
Number
of Stores
|
|
|
Percentage of Total
Number of Stores
|
|
California
|
|
1955
|
|
|
223
|
|
|
|
51.9
|
%
|
Washington
|
|
1984
|
|
|
46
|
|
|
|
10.7
|
|
Arizona
|
|
1993
|
|
|
41
|
|
|
|
9.5
|
|
Oregon
|
|
1995
|
|
|
29
|
|
|
|
6.7
|
|
Colorado
|
|
2001
|
|
|
22
|
|
|
|
5.1
|
|
New Mexico
|
|
1995
|
|
|
19
|
|
|
|
4.4
|
|
Nevada
|
|
1978
|
|
|
18
|
|
|
|
4.2
|
|
Utah
|
|
1997
|
|
|
17
|
|
|
|
4.0
|
|
Idaho
|
|
1994
|
|
|
11
|
|
|
|
2.6
|
|
Texas
|
|
1995
|
|
|
3
|
|
|
|
0.7
|
|
Wyoming
|
|
2010
|
|
|
1
|
|
|
|
0.2
|
|
Total
|
|
|
|
|
430
|
|
|
|
100.0
|
%
|
Our same store sales per square foot were approximately $209 for fiscal 2020. Our same store sales per square foot combined with our efficient store-level operations and low store maintenance costs have allowed us to historically generate strong store-level returns.
21
ITEM 3.
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LEGAL PROCEEDINGS
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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 4.
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MINE SAFETY DISCLOSURES
|
None.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
Description of Business
|
Big 5 Sporting Goods Corporation (the “Company”) is a leading sporting goods retailer in the western United States, operating 430 stores and an e-commerce platform as of January 3, 2021. The Company provides a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. The Company’s product mix includes athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, home recreation, tennis, golf and winter and summer recreation. The Company is a holding company that operates as one reportable segment under the “Big 5 Sporting Goods” name through Big 5 Corp., its 100%-owned subsidiary, and Big 5 Services Corp., which is a 100%-owned subsidiary of Big 5 Corp. Big 5 Services Corp. provides a centralized operation for the issuance and administration of gift cards and returned merchandise credits (collectively, “stored-value cards”).
The accompanying consolidated financial statements as of January 3, 2021 and December 29, 2019 and for the years ended January 3, 2021 (“fiscal 2020”) and December 29, 2019 (“fiscal 2019”) represent the financial position, results of operations and cash flows of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
(2)
|
Summary of Significant Accounting Policies
|
Consolidation
The accompanying consolidated financial statements include the accounts of Big 5 Sporting Goods Corporation, Big 5 Corp. and Big 5 Services Corp. Intercompany balances and transactions have been eliminated in consolidation.
Reporting Period
The Company follows the concept of a 52-53 week fiscal year, which ends on the Sunday nearest December 31. Fiscal 2020 included 53 weeks and fiscal 2019 included 52 weeks.
Recently Adopted Accounting Updates
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This standard removes, modifies, and adds certain disclosure requirements for fair value measurements, and is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU No. 2018-13 in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and the impact from this standard was immaterial.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company’s accounting for the service element of a hosting arrangement that is a service contract is not affected by the proposed amendments and will continue to be expensed as incurred in accordance with existing guidance. This standard does not expand on existing disclosure requirements except to require a description of the nature of hosting arrangements that are service contracts. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and can be adopted either prospectively or retrospectively. Accordingly, the Company adopted the updated disclosure requirements of ASU No. 2018-15 prospectively in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and the impact from this standard was immaterial.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, while also clarifying and amending existing guidance, including interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU No. 2019-12 in the first quarter of fiscal 2020 and the impact from this standard was immaterial.
F-9
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Recently Issued Accounting Updates
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this standard are elective and are effective upon issuance for all entities. The Company is evaluating the expedients and exceptions provided by the amendments in this standard to determine their impact.
Other recently issued accounting updates are not expected to have a material impact on the Company’s consolidated financial statements.
COVID-19 Impact on Concentration of Risk
The novel coronavirus (“COVID-19”) pandemic has significantly impacted health and economic conditions throughout the United States and globally, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine.
The Company primarily operates traditional sporting goods retail stores located in the western United States, with approximately 52% of its stores, along with its corporate offices and distribution center, located in California. Because of this, the Company is subject to regional risks, including the impact of the COVID-19 outbreak. Beginning on March 20, 2020, the Company temporarily closed more than one-half of its retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. The Company was subsequently able to gradually reopen its store locations based on initially qualifying as an “essential” business under applicable regulations and later as a result of the easing of regulatory restrictions on retail operations in the Company’s market areas. As of the end of the second quarter of fiscal 2020, all of the Company’s stores that were temporarily closed due to COVID-19 had reopened for in-store shopping, subject to appropriate social distancing restrictions and with reduced operating hours. These restrictions and reduced operating hours continued into the third and fourth quarters of fiscal 2020. New temporary closures of stores may be required if additional orders are issued in response to changing health conditions. Additionally, during fiscal 2020, the pandemic and the shelter orders that were in place in the Company’s market areas negatively impacted customer traffic into the Company’s stores. In an effort to promote social distancing protocols, the Company has implemented reduced store hours, limited the number of customers in its stores at any one time and has generally implemented social-distancing guidelines throughout the store operating space. Due to the reduced customer traffic, and in an effort to preserve capital, the Company implemented temporary and permanent workforce reductions throughout the organization, temporarily reduced merchandise inventory orders and reduced advertising and capital spending in fiscal 2020. The Company may further restrict its store operations and operations in its distribution facility if deemed necessary or if recommended or mandated by authorities.
A substantial amount of the Company’s inventory is manufactured abroad. COVID-19 has also impacted the Company’s supply chain for products sold, particularly those products that are sourced from China. To the extent one or more vendors is negatively impacted by COVID-19, including due to the closure of those vendors’ distribution centers or manufacturing facilities, the Company may be unable to maintain delivery schedules or adequate inventory in its stores.
General Concentration of Risk
The Company maintains its cash accounts in financial institutions, and accounts at these institutions are insured by the Federal Deposit Insurance Corporation up to $250,000. Cash equivalents represent investments of excess cash on hand of $50.0 million into U.S. Treasury bills.
Because of the Company’s geographic concentration in the western United States, the Company is subject to regional risks, such as the economy, including downturns in the housing market, state financial conditions, unemployment and gas prices. Other regional risks include weather conditions, fires, droughts, earthquakes, power outages and other natural disasters specific to the states in which the Company operates.
F-10
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company relies on a single distribution center located in Riverside, California, which services all of its stores and e-commerce platform. Any natural disaster or other serious disruption to the distribution center due to fire, earthquake or any other cause could damage a significant portion of inventory and could materially impair the Company’s ability to adequately stock its stores and fulfill its e-commerce business.
A substantial amount of the Company’s inventory is manufactured abroad. From time to time, shipping ports experience capacity constraints, 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, could significantly disrupt operations at shipping ports or otherwise impact transportation of the imported merchandise we sell.
The Company purchases merchandise from over 680 suppliers, and the Company’s 20 largest suppliers accounted for 36.4% of total purchases in fiscal 2020. One vendor represented greater than 5% of total purchases, at 8.5%, in fiscal 2020. A significant portion of the Company’s inventory is manufactured abroad in China and other countries. Foreign imports subject the Company to the risks of changes in, or the imposition of new, import tariffs, duties or quotas, new restrictions on imports, loss of “most favored nation” status with the United States for a particular foreign country, antidumping or countervailing duty orders, retaliatory actions in response to illegal trade practices, work stoppages, delays in shipment, freight expense increases, product cost increases due to foreign currency fluctuations or revaluations, public health issues that could lead to temporary closures of facilities or shipping ports, such as the recent outbreak of COVID-19, and other economic uncertainties. If a disruption of trade were to occur from the countries in which the suppliers of the Company’s vendors are located, the Company may be unable to obtain sufficient quantities of products to satisfy its requirements, or the cost of obtaining products may increase.
The Company could be exposed to credit risk in the event of nonperformance by any lender under its revolving credit facility. Instability in the financial and capital markets could bring additional potential risks to the Company, including higher costs of credit, potential lender defaults, and potential commercial bank failures. The Company has received no indication that any such events will negatively impact any lender under its credit facility; however, the possibility does exist.
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 consolidated financial statements and reported amounts of revenue and expense during the reporting period to prepare these consolidated 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 January 3, 2021, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by management’s assumptions and estimates.
Segment Reporting
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, and whose Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer. The CODM reviews financial information presented on a consolidated basis, for purposes of allocating resources and evaluating financial performance. The Company’s stores typically have similar square footage, with the stores and e-commerce platform offering a similar general product mix. The Company’s core customer demographic remains similar across all sales channels, as does the Company’s process for the procurement and marketing of its product mix. Furthermore, the Company distributes its product mix for both the stores and e-commerce platform from a single distribution center. Given the consolidated level of review by the CODM, the Company operates as one reportable segment as defined by ASC 280, Segment Reporting.
F-11
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Earnings Per Share
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.
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, in 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 reasonably assured since the Company only extends immaterial credit purchases to certain municipalities and local school districts.
As noted in the segment information elsewhere in this Note 2 to the Notes to Consolidated Financial Statements, the Company’s business consists of one reportable segment. In accordance with 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:
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
|
|
|
|
(In thousands)
|
|
Hardgoods
|
|
|
|
|
|
$
|
623,728
|
|
|
$
|
493,749
|
|
Athletic and sport footwear
|
|
|
|
|
|
|
228,311
|
|
|
|
279,733
|
|
Athletic and sport apparel
|
|
|
|
|
|
|
184,538
|
|
|
|
219,066
|
|
Other sales
|
|
|
|
|
|
|
4,635
|
|
|
|
3,947
|
|
Net sales
|
|
|
|
|
|
$
|
1,041,212
|
|
|
$
|
996,495
|
|
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 transaction price for each contract is the stated price on the product, reduced by any stated discounts at that point in time. The Company does not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit point-of-sale contract with the customer, as reflected in the transaction receipt, states the final terms of the sale, including the description, quantity, and price of each product purchased. Payment for the Company’s contracts is due in full upon delivery. The customer agrees to a stated price implicit in the contract.
F-12
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The transaction price relative to sales subject to a right of return reflects the amount of estimated consideration to which the Company expects to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. There were no material adjustments to the Company’s previous estimates. The allowance for sales returns is estimated based upon historical experience and a provision for estimated returns is recorded as a reduction in sales in the relevant period. The estimated right-of-return merchandise cost related to the sales returns is recorded as prepaid expense in the Company’s consolidated balance sheet as of January 3, 2021. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net sales and earnings in the period such variances become known.
The Company has elected to apply the practical expedient, relative to e-commerce sales, which allows an entity to account for shipping and handling as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only one performance obligation, the sale of the product, at shipping point (when the customer gains control). Revenue associated with e-commerce sales is not material.
Contract liabilities are recognized primarily for stored-value card sales. Cash received from the sale of stored-value cards is recorded as a contract liability in accrued expenses, and the Company recognizes revenue upon the customer’s redemption of the stored-value card. Stored-value card breakage is recognized as revenue in proportion to the pattern of customer redemptions by applying a historical breakage rate of five percent. The Company does not sell or provide stored-value cards that carry expiration dates.
The Company recognized $5.4 million and $6.6 million in stored-value card redemption revenue for fiscal 2020 and 2019, respectively. The Company also recognized $0.3 million and $0.4 million in stored-value card breakage revenue for fiscal 2020 and 2019, respectively. The Company had outstanding stored-value card liabilities of $7.5 million and $7.2 million as of January 3, 2021 and December 29, 2019, respectively, which are included in accrued expenses. Based upon historical experience, stored-value cards are predominantly redeemed in the first two years following their issuance date.
The Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $1.2 million and $1.4 million related to estimated sales returns as of January 3, 2021 and December 29, 2019, respectively, and recorded, as accrued expense, an allowance for sales returns reserve of $2.4 million and $2.7 million as of January 3, 2021 and December 29, 2019, respectively.
Cost of Sales
Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight (including e-commerce shipping and handling costs), inventory reserves, buying, distribution center expense, including depreciation and amortization, and store occupancy expense. Store occupancy expense includes rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance.
Selling and Administrative Expense
Selling and administrative expense includes store-related expense, other than store occupancy expense, as well as advertising, depreciation and amortization, expense associated with operating the Company’s corporate headquarters and impairment charges, if any.
Vendor Allowances
The Company receives allowances for co-operative advertising and volume purchase rebates earned through programs with certain vendors. The Company records a receivable for these allowances which are earned but not yet received when it is determined the amounts are probable and reasonably estimable. Amounts relating to the purchase of merchandise are treated as a reduction of inventory cost and reduce cost of goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction in selling and administrative expense.
F-13
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Advertising Expense
Advertising is expensed when the advertising first occurs. Advertising expense, net of co-operative advertising allowances, amounted to $10.6 million and $27.8 million for fiscal 2020 and 2019, respectively. The Company reduced advertising significantly in fiscal 2020 in response to the COVID-19 pandemic. Advertising expense is included in selling and administrative expense in the accompanying consolidated statements of operations. The Company receives co-operative advertising allowances from certain product vendors in order to subsidize qualifying advertising and similar promotional expenditures made relating to vendors’ products. These advertising allowances are recognized as a reduction to selling and administrative expense when the Company incurs the advertising expense eligible for the credit. Co-operative advertising allowances recognized as a reduction to selling and administrative expense amounted to $1.1 million and $5.1 million for fiscal 2020 and 2019, respectively.
Share-Based Compensation
The Company accounts for its share-based compensation in accordance with ASC 718, Compensation—Stock Compensation. The Company recognizes compensation expense on a straight-line basis over the requisite service period using the fair-value method for share option awards, nonvested share awards and nonvested share unit awards granted with service-only conditions. See Note 14 to the Notes to Consolidated Financial Statements for a further discussion on share-based compensation.
Pre-opening Costs
Pre-opening costs for new stores, which are not material, consist primarily of payroll and recruiting expense, training, marketing, rent, travel and supplies, and are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments of excess cash into U.S. Treasury bills, which have maturities of 90 days or less. Book overdrafts are classified as current liabilities.
Accounts Receivable
Accounts receivable consist primarily of third party purchasing card receivables, amounts due from inventory vendors for returned products, volume purchase rebates or co-operative advertising, amounts due from lessors for tenant improvement allowances and insurance recovery receivables. Accounts receivable have not historically resulted in any material credit losses. An allowance for doubtful accounts is provided when accounts are determined to be uncollectible.
Valuation of Merchandise Inventories, Net
The Company’s merchandise inventories are made up of finished goods and are valued at the lower of cost or net realizable value using the weighted-average cost method that approximates the first-in, first-out (“FIFO”) method. Average cost includes the direct purchase price of merchandise inventory, net of vendor allowances and cash discounts, in-bound freight-related expense and allocated overhead expense associated with the Company’s distribution center.
Management regularly reviews inventories and records valuation reserves for damaged and defective merchandise, merchandise items with slow-moving or obsolescence exposure and merchandise that has a carrying value that exceeds net realizable value. Because of its merchandise mix, the Company has not historically experienced significant occurrences of obsolescence.
Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends. The Company performs physical inventories of its stores at least once per year and cycle counts inventories at its distribution center throughout the year. The reserve for inventory shrinkage primarily represents an estimate for inventory shrinkage for each store since the last physical inventory date through the reporting date.
These reserves are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from expectations.
F-14
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Prepaid Expenses and Other Assets
Prepaid expenses include the prepayment of various operating expenses such as insurance, income and property taxes, software maintenance and supplies, which are expensed when the operating cost is realized.
Other assets include the long-term portion of certain prepaid expenses, capitalized deferred financing fees related to the Company’s credit facility and capitalized implementation costs related to hosting arrangements that are service contracts. While deferred financing fees and implementation costs are capitalized and amortized over the respective terms of their arrangements, costs related to the service element of a hosting arrangement that is a service contract are expensed as incurred.
Property and Equipment, Net
Property and equipment are stated at cost and are being depreciated or amortized utilizing the straight-line method over the following estimated useful lives:
Land
|
|
Indefinite
|
Buildings
|
|
20 years
|
Leasehold improvements
|
|
Shorter of estimated useful life or term of lease
|
Furniture and equipment
|
|
3 – 10 years
|
Internal-use software
|
|
3 – 7 years
|
Maintenance and repairs are expensed as incurred.
The Company incurs costs to purchase and develop software for internal use. Costs related to the application development stage are capitalized and amortized over the estimated useful life of the software. Costs related to the design or maintenance of internal-use software are expensed as incurred. See Note 3 to the Notes to Consolidated Financial Statements for a further discussion on property and equipment.
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 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 or 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.
F-15
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The resulting impairment charge, if any, is allocated to the property and equipment, primarily leasehold improvements, and operating lease ROU assets on a pro rata basis using the relative carrying amounts of those assets. The allocated impairment charge to a long-lived asset is limited to the extent that the impairment charge does not reduce the carrying amount of the long-lived asset below its individual fair value. The estimation of the fair value of an ROU asset involves the evaluation of current market value rental amounts for leases associated with ROU assets. The estimates of current market value rental amounts are primarily based on recent observable market rental data of other comparable retail store locations. The fair value of an ROU asset is measured using a discounted cash flow valuation technique by discounting the estimated current and future market rental values using a property-specific discount rate.
In fiscal 2020, the Company recognized no non-cash impairment charges and in fiscal 2019, the Company recognized non-cash impairment charges of $0.5 million related to certain underperforming stores. These impairment charges represented property and equipment, primarily leasehold improvements, and are included in selling and administrative expense in the consolidated statements of operations. The individual fair values of the property and equipment, primarily leasehold improvements, of the impaired store asset group were not material for fiscal 2019. See Note 4 to the Notes to Consolidated Financial Statements for a further discussion on impairment of assets.
Leases
In accordance with ASC 842, Leases, the Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware, and distribution center delivery tractors and equipment. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the consolidated balance sheets. Finance leases are included in property and equipment and finance lease liabilities on the 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 consolidated statement 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 balance sheet. 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 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.
F-16
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in ASC 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic, in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
In accordance with this interpretive guidance, the Company elected to account for lease concessions related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. The Company accounted for COVID-19 lease abatements of $3.1 million in fiscal 2020 as reductions to variable lease expense and accounted for lease deferrals of $0.6 million as of January 3, 2021 as if no changes to the lease contract were made while continuing to recognize expense during the deferral period and deferring the payment obligation as a liability.
See Note 7 to the Notes to Consolidated Financial Statements for a further discussion on leases.
Self-Insurance Liabilities
The Company is self-insured for its various insurance risks including its estimated workers’ compensation liability risk in certain states. The Company also has a self-funded insurance program for a portion of its employee medical benefits. Under these programs, the Company maintains insurance coverage for losses in excess of specified per-occurrence amounts. Estimated expenses incurred under the self-insured workers’ compensation and medical benefits programs, including incurred but not reported claims, are recorded as expense based upon historical experience, trends of paid and incurred claims, and other actuarial assumptions. If actual claims trends under these programs, including the severity or frequency of claims, differ from the Company’s estimates, its financial results may be significantly impacted. The Company’s actuarially-estimated self-insurance liabilities, which are reported gross of expected workers’ compensation insurance reimbursements, are classified on the balance sheet as accrued expenses or other long-term liabilities based upon whether they are expected to be paid during or beyond the normal operating cycle of 12 months from the date of the consolidated financial statements. Self-insurance liabilities totaled $11.0 million and $10.8 million as of January 3, 2021 and December 29, 2019, respectively, of which $4.8 million and $4.7 million were recorded as a component of accrued expenses as of January 3, 2021 and December 29, 2019, respectively, and $6.2 million and $6.1 million were recorded as a component of other long-term liabilities as of January 3, 2021 and December 29, 2019, respectively, in the accompanying consolidated balance sheets.
Income Taxes
Under the asset and liability method prescribed within 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. Certain prior period deferred tax disclosures were reclassified to conform with current period presentation.
ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
F-17
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company’s practice is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in selling and administrative expense. As of January 3, 2021 and December 29, 2019, the Company had no accrued interest or penalties. See Note 9 to the Notes to Consolidated Financial Statements for a further discussion on income taxes.
Treasury Stock Purchases
The Company repurchases its common stock in the open market pursuant to programs approved by its Board of Directors. The Board of Directors authorized a share repurchase program for the purchase of up to $25.0 million of the Company’s common stock. Under the authorization, the Company 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 Securities and Exchange Commission. The Company may repurchase its common stock for a variety of reasons, including, among other things, its alternative cash requirements, existing business conditions and the current market price of its stock. However, the timing and amount of such purchases, if any, would be at the discretion of management and the Board of Directors. The Company repurchased no shares of common stock in fiscal 2020 or 2019. As of January 3, 2021, a total of $15.3 million remained available for share repurchases under its current share repurchase program.
(3)
|
Property and Equipment, Net
|
Property and equipment, net, consist of the following:
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
(In thousands)
|
|
Furniture and equipment
|
|
$
|
134,623
|
|
|
$
|
138,241
|
|
Leasehold improvements
|
|
|
170,701
|
|
|
|
167,965
|
|
Internal-use software
|
|
|
37,147
|
|
|
|
36,332
|
|
Land
|
|
|
2,750
|
|
|
|
2,750
|
|
Building
|
|
|
1,775
|
|
|
|
1,775
|
|
|
|
|
346,996
|
|
|
|
347,063
|
|
Accumulated depreciation and amortization (1)
|
|
|
(290,638
|
)
|
|
|
(279,796
|
)
|
|
|
|
56,358
|
|
|
|
67,267
|
|
Assets not placed into service
|
|
|
887
|
|
|
|
1,147
|
|
Property and equipment, net
|
|
$
|
57,245
|
|
|
$
|
68,414
|
|
|
(1)
|
Includes accumulated amortization for internal-use software development costs of $30.8 million and $28.9 million as of January 3, 2021 and December 29, 2019, respectively.
|
|
Depreciation expense associated with property and equipment, including assets leased under finance leases, was $6.7 million and $6.8 million for fiscal 2020 and 2019, respectively. Amortization expense for leasehold improvements was $8.9 million and $9.7 million for fiscal 2020 and 2019, respectively. Amortization expense for internal-use software was $2.9 million and $3.0 million for fiscal 2020 and 2019, respectively. The gross cost of equipment under finance leases, included above, was $10.1 million and $12.1 million as of January 3, 2021 and December 29, 2019, respectively. The accumulated depreciation related to these finance leases was $5.5 million and $4.8 million as of January 3, 2021 and December 29, 2019, respectively.
F-18
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets subject to the Company’s evaluation totaled $57.2 million and $68.4 million for property and equipment as of January 3, 2021 and December 29, 2019, respectively, and totaled $278.6 million and $262.6 million for ROU assets as of January 3, 2021 and December 29, 2019, respectively. In fiscal 2020, the Company recognized no non-cash impairment charges, and in fiscal 2019, the Company recognized non-cash impairment charges of $0.5 million related to certain underperforming stores. These impairment charges represented property and equipment and leasehold improvements and are included in selling and administrative expense in the consolidated statements of operations. In fiscal 2019, the lower-than-expected sales performance, coupled with future undiscounted cash flow projections, indicated that the carrying value of these stores’ assets exceeded their estimated fair values as determined by their future discounted cash flow projections. An impairment charge was not allocated to the ROU assets because the fair value of the ROU assets exceeded their carrying value.
(5)
|
Fair Value Measurements
|
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate the fair values of these instruments due to their short-term nature. The carrying amount for borrowings under the Company’s credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. When the Company recognizes impairment on certain of its underperforming stores, the carrying values of these stores are reduced to their estimated fair values.
As of January 3, 2021 and December 29, 2019, 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. As discussed in Note 4 to the Notes to Consolidated Financial Statements, the Company estimated 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 classified 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.
The major components of accrued expenses are as follows:
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
(In thousands)
|
|
Payroll and related expense
|
|
$
|
37,826
|
|
|
$
|
23,433
|
|
Sales tax
|
|
|
11,609
|
|
|
|
9,607
|
|
Occupancy expense
|
|
|
10,215
|
|
|
|
9,503
|
|
Other
|
|
|
23,227
|
|
|
|
22,392
|
|
Accrued expenses
|
|
$
|
82,877
|
|
|
$
|
64,935
|
|
Payroll and related expense as of January 3, 2021 reflected a deferral of the employer portion of Social Security tax provided by the U.S. Coronavirus Aid, Relief and Economic Security Act, which allowed employers to defer their portion of the social security payroll tax otherwise due with respect to wages earned from March 27, 2020 through December 31, 2020, as well as an increase in company performance-based incentive accruals.
F-19
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company adopted ASC 842 as of December 31, 2018, using the modified retrospective approach and applying transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, results and disclosures for the reporting periods beginning on December 31, 2018 are reported and presented under ASC 842. Adoption of the standard resulted in the initial recognition of operating lease ROU assets of $262.9 million and operating lease liabilities of $279.7 million as of December 31, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statements of operations, shareholders’ equity or cash flows, and had no material impact on beginning retained earnings in fiscal 2019. Additionally, the Company elected the transition package of practical expedients permitted within the new standard which, among other things, allowed it to carry forward the historical lease classification. The Company did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of ROU assets.
The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware and distribution center delivery tractors and equipment, and accounts for these leases in accordance with ASC 842. The Company’s operating leases have remaining reasonably certain lease terms of up to 13 years, which typically include options to extend the leases for up to 5 years. The Company’s finance leases have remaining reasonably certain lease terms of up to 3 years.
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.
In accordance with ASC 842, the components of lease expense were as follows:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
(In thousands)
|
|
Lease expense:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
2,721
|
|
|
$
|
2,673
|
|
Interest on lease liabilities
|
|
|
297
|
|
|
|
378
|
|
Finance lease expense
|
|
|
3,018
|
|
|
|
3,051
|
|
Operating lease expense
|
|
|
83,030
|
|
|
|
80,470
|
|
Variable lease expense (1)
|
|
|
15,238
|
|
|
|
15,515
|
|
Sublease income
|
|
|
(1,192
|
)
|
|
|
(1,158
|
)
|
Total lease expense
|
|
$
|
100,094
|
|
|
$
|
97,878
|
|
|
(1)
|
Variable lease expense for fiscal 2020 was reduced by $3.1 million for lease abatements related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. See Note 2 to the Notes to Consolidated Financial Statements for a further discussion on lease concessions.
|
|
F-20
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In accordance with ASC 842, other information related to leases was as follows:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
(In thousands)
|
|
Operating cash flows from operating leases
|
|
$
|
83,028
|
|
|
$
|
82,200
|
|
Operating cash flows from finance leases
|
|
|
313
|
|
|
|
377
|
|
Financing cash flows from finance leases
|
|
|
2,858
|
|
|
|
2,547
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
86,199
|
|
|
$
|
85,124
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
—
|
|
|
$
|
3,123
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
80,452
|
|
|
$
|
60,548
|
|
Weighted-average remaining lease term—finance leases
|
|
2.4 years
|
|
|
3.1 years
|
|
Weighted-average remaining lease term—operating leases
|
|
5.0 years
|
|
|
5.2 years
|
|
Weighted-average discount rate—finance leases
|
|
|
4.8
|
%
|
|
|
4.7
|
%
|
Weighted-average discount rate—operating leases
|
|
|
6.1
|
%
|
|
|
6.3
|
%
|
In accordance with ASC 842, maturities of finance and operating lease liabilities as of January 3, 2021 were as follows:
Year Ending:
|
|
Finance
Leases
|
|
|
Operating
Leases
|
|
|
|
(In thousands)
|
|
2021
|
|
$
|
2,209
|
|
|
$
|
84,759
|
|
2022
|
|
|
1,740
|
|
|
|
73,890
|
|
2023
|
|
|
920
|
|
|
|
58,099
|
|
2024
|
|
|
—
|
|
|
|
49,287
|
|
2025
|
|
|
—
|
|
|
|
33,178
|
|
Thereafter
|
|
|
—
|
|
|
|
40,335
|
|
Undiscounted cash flows
|
|
$
|
4,869
|
|
|
$
|
339,548
|
|
Reconciliation of lease liabilities:
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
2.4 years
|
|
|
5.0 years
|
|
Weighted-average discount rate
|
|
|
4.8
|
%
|
|
|
6.1
|
%
|
Present values
|
|
$
|
4,593
|
|
|
$
|
291,525
|
|
Lease liabilities - current
|
|
|
2,089
|
|
|
|
73,737
|
|
Lease liabilities - long-term
|
|
|
2,504
|
|
|
|
217,788
|
|
Lease liabilities - total
|
|
$
|
4,593
|
|
|
$
|
291,525
|
|
Difference between undiscounted and discounted cash flows
|
|
$
|
276
|
|
|
$
|
48,023
|
|
F-21
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company, Big 5 Corp. and Big 5 Services Corp. were parties to a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and a syndicate of other lenders, as amended (the “Prior Credit Agreement”), which was terminated and replaced on February 24, 2021, as discussed below.
On February 24, 2021, the Company entered into a Loan, Guaranty and Security Agreement with Bank of America, N.A. (“BofA”), as agent and lender (the “Loan Agreement”), at which time the Prior Credit Agreement was terminated. 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. The Company may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lenders under the Loan Agreement will have the option to increase the commitment to accommodate the requested increase. If such existing lenders do not exercise that option, the Company 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.
Similar to the Prior Credit Agreement, 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) 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.
Generally, the Company may designate specific borrowings under the Loan Agreement as either base rate loans or LIBO 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 LIBO rate loans bear interest at a rate equal to the then applicable adjusted LIBO rate 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 LIBO 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 is a function of Average Daily Availability for the preceding fiscal quarter as set forth below.
Level
|
|
Average Daily Availability
|
|
LIBO Rate
Applicable Margin
|
|
|
Base Rate
Applicable Margin
|
|
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.
F-22
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Obligations under the Loan Agreement are secured by a general lien on and security interest in substantially all of the Company’s assets. The Loan Agreement contains covenants that require the Company 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. The Company 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 the Company is permitted to make up to $5 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 the Company, 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.
As previously disclosed, the Prior Credit Agreement had a maturity date of September 29, 2022 and, as amended, provided for a line of credit up to $140.0 million, which amount could be increased at the Company’s option up to a maximum of $165.0 million. The Company could also request additional increases in aggregate availability, on an uncommitted basis up to a maximum of $200.0 million. On March 30, 2020, the Company exercised the accordion feature and increased the amount available under the revolving credit facility to $165.0 million in response to the COVID-19 pandemic and drew down additional amounts at that time. The revolving credit facility under the Prior Credit Agreement included a $25.0 million sublimit for issuances of letters of credit and a $20.0 million sublimit for swingline loans. The Prior Credit Agreement provided for LIBO rate loans to bear interest at a rate equal to the applicable adjusted LIBO rate plus an applicable margin, as shown in the table below. The loans designated as base rate loans bore 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 in effect plus one-half of one percent, (b) the LIBO rate, plus one percentage point, or (c) the prime interest rate. Under the Prior Credit Agreement, the applicable margin for all loans was a function of Average Daily Availability for the preceding fiscal quarter as set forth below.
Level
|
|
Average Daily Availability
|
|
LIBO Rate
Applicable Margin
|
|
|
Base Rate
Applicable Margin
|
|
I
|
|
Greater than or equal to $70,000,000
|
|
1.250%
|
|
|
0.250%
|
|
II
|
|
Less than $70,000,000
|
|
1.375%
|
|
|
0.500%
|
|
The commitment fee assessed on the unused portion of the credit facility under the Prior Credit Agreement was 0.20% per annum.
As of January 3, 2021, the Company had no long-term revolving credit borrowings outstanding. As of December 29, 2019, the Company had long-term revolving credit borrowings outstanding bearing interest at either LIBO or the prime lending rates as follows:
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
(Dollars in thousands)
|
|
LIBO rate
|
|
$
|
—
|
|
|
$
|
60,000
|
|
Prime rate
|
|
|
—
|
|
|
|
6,559
|
|
Total borrowings
|
|
$
|
—
|
|
|
$
|
66,559
|
|
|
|
|
|
|
|
|
|
|
LIBO rate
|
|
|
—
|
|
|
|
1.8
|
%
|
Prime rate
|
|
|
—
|
|
|
|
4.8
|
%
|
Average interest rate
|
|
|
2.7
|
%
|
|
|
3.8
|
%
|
Year-end interest rate
|
|
|
—
|
|
|
|
3.6
|
%
|
F-23
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Income tax (benefit) expense consists of the following:
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Fiscal 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
13,786
|
|
|
$
|
86
|
|
|
$
|
13,872
|
|
State
|
|
|
4,871
|
|
|
|
(298
|
)
|
|
|
4,573
|
|
|
|
$
|
18,657
|
|
|
$
|
(212
|
)
|
|
$
|
18,445
|
|
Fiscal 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,746
|
|
|
$
|
541
|
|
|
$
|
2,287
|
|
State
|
|
|
546
|
|
|
|
505
|
|
|
|
1,051
|
|
|
|
$
|
2,292
|
|
|
$
|
1,046
|
|
|
$
|
3,338
|
|
The provision for income taxes differs from the amounts computed by applying the federal statutory tax rate of 21% to earnings before income taxes, as follows:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
(In thousands)
|
|
Tax expense at statutory rate
|
|
$
|
15,621
|
|
|
$
|
2,474
|
|
State tax expense, net of federal tax effect
|
|
|
3,975
|
|
|
|
626
|
|
CARES Act net operating loss carryback
|
|
|
(822
|
)
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(418
|
)
|
|
|
—
|
|
Write-offs related to nonvested share awards
|
|
|
260
|
|
|
|
393
|
|
Tax credits
|
|
|
(246
|
)
|
|
|
(323
|
)
|
Nondeductible expenses
|
|
|
86
|
|
|
|
102
|
|
Change in apportionment and other rate adjustments
|
|
|
(11
|
)
|
|
|
104
|
|
Other
|
|
|
—
|
|
|
|
(38
|
)
|
|
|
$
|
18,445
|
|
|
$
|
3,338
|
|
Deferred tax assets and liabilities as of January 3, 2021 and December 29, 2019 are tax-effected based on the federal and state corporate income tax rates.
F-24
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Deferred tax assets and liabilities consist of the following tax-effected temporary differences:
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
$
|
3,509
|
|
|
$
|
4,322
|
|
Employee benefit-related liabilities
|
|
|
2,986
|
|
|
|
2,621
|
|
Insurance liabilities
|
|
|
2,581
|
|
|
|
2,495
|
|
Merchandise inventory
|
|
|
2,253
|
|
|
|
1,624
|
|
Gift card liability
|
|
|
1,324
|
|
|
|
1,125
|
|
State taxes
|
|
|
1,014
|
|
|
|
118
|
|
California Enterprise Zone Tax Credits
|
|
|
975
|
|
|
|
1,395
|
|
Share-based compensation
|
|
|
815
|
|
|
|
797
|
|
Other deferred tax assets
|
|
|
1,396
|
|
|
|
2,428
|
|
Gross deferred tax assets
|
|
|
16,853
|
|
|
|
16,925
|
|
Less: Valuation allowance
|
|
|
(683
|
)
|
|
|
(1,212
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
16,170
|
|
|
|
15,713
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Federal liability on state deferred tax assets
|
|
|
(1,125
|
)
|
|
|
(1,063
|
)
|
Prepaid expense
|
|
|
(989
|
)
|
|
|
(759
|
)
|
Other deferred tax liabilities
|
|
|
(225
|
)
|
|
|
(272
|
)
|
Deferred tax liabilities
|
|
|
(2,339
|
)
|
|
|
(2,094
|
)
|
Net deferred tax assets
|
|
$
|
13,831
|
|
|
$
|
13,619
|
|
As of fiscal 2020 and 2019, the Company maintained a valuation allowance of $0.7 million and $1.2 million, respectively, related to unused California Enterprise Zone Tax Credits, which the Company will not be able to carry forward beyond 2024 as a result of California’s termination of this program. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections of future taxable income over the periods during which the deferred tax assets are deductible, except as noted above, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income are reduced. Certain prior period amounts were reclassified to conform with current period presentation requirements.
The Company files a consolidated federal income tax return and files tax returns in various state and local jurisdictions. The statutes of limitations for its consolidated federal income tax returns are open for fiscal years 2017 and after, and state and local income tax returns are open for fiscal years 2016 and after.
As of January 3, 2021 and December 29, 2019, the Company had no unrecognized tax benefits that, if recognized, would affect the Company’s effective income tax rate over the next 12 months. The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. As of January 3, 2021 and December 29, 2019, the Company had no accrued interest or penalties.
F-25
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
|
(In thousands, except per share data)
|
|
Net income
|
|
$
|
55,940
|
|
|
$
|
8,445
|
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,260
|
|
|
|
21,103
|
|
Dilutive effect of common stock equivalents arising
from share option, nonvested share and nonvested
share unit awards
|
|
|
403
|
|
|
|
46
|
|
Diluted
|
|
|
21,663
|
|
|
|
21,149
|
|
Basic earnings per share
|
|
$
|
2.63
|
|
|
$
|
0.40
|
|
Diluted earnings per share
|
|
$
|
2.58
|
|
|
$
|
0.40
|
|
Antidilutive share option awards excluded
from diluted calculation
|
|
|
494
|
|
|
|
499
|
|
Antidilutive nonvested share and nonvested share unit
awards excluded from diluted calculation
|
|
|
46
|
|
|
|
457
|
|
The computation of diluted earnings per share for the periods presented excludes certain share option awards since the exercise prices of these share option awards exceeded the average market price of the Company’s common shares, and the effect of their inclusion would have been antidilutive (i.e., including such share option awards would result in higher earnings per share). Additionally, the computation of diluted earnings per share for the periods presented excludes certain nonvested share awards and nonvested share unit awards that were outstanding and antidilutive, since the grant date fair values of these nonvested share awards and nonvested share unit awards exceeded the average market price of the Company’s common shares.
(11)
|
Employee Benefit Plans
|
The Company has a 401(k) plan covering eligible employees. Employee contributions are supplemented by Company contributions subject to 401(k) plan terms. The Company recognized employer matching and profit-sharing contributions of $3.7 million and $2.2 million for fiscal 2020 and 2019, respectively.
(12)
|
Related Party Transactions
|
Prior to his death in fiscal 2008, the Company had an employment agreement with Robert W. Miller (“Mr. Miller”), co-founder of the Company and the father of Steven G. Miller, Chairman of the Board, President, Chief Executive Officer and a director of the Company. The employment agreement provided for Mr. Miller to receive an annual base salary of $350,000. The employment agreement further provided that, following his death, the Company will pay his surviving wife $350,000 per year and provide her specified benefits for the remainder of her life. During each of fiscal 2020 and 2019, the Company made a payment of $350,000 to Mr. Miller’s wife. The Company recognized expense of $0.3 million in fiscal 2020 and 2019, to provide for a liability for the future obligations under this agreement. Based upon actuarial valuation estimates related to this agreement, the Company had a recorded liability of $1.0 million as of January 3, 2021 and December 29, 2019. The short-term portion of this liability is recorded in accrued expenses and the long-term portion is recorded in other long-term liabilities in the accompanying consolidated balance sheets.
In January 2021, Mrs. Miller passed away and, accordingly, the Company will eliminate the liability of $1.0 million and reduce selling and administrative expense by the same amount in the first quarter of fiscal 2021.
F-26
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(13)
|
Commitments and Contingencies
|
Eminent Domain Matter
On approximately March 13, 2018, the Orange County Transportation Authority (“OCTA”) filed an eminent domain action against the Company and its Westminster, California, store location to acquire the Company’s leased interest in the property for public purposes related to a transportation project. The Company surrendered possession of this location on approximately January 31, 2019. On March 31, 2020, the Company and representatives of the OCTA agreed to a preliminary settlement of the proceedings, which was formally approved by the OCTA’s Board on approximately April 27, 2020. Pursuant to the terms of the settlement, on May 21, 2020, the Company received a cash condemnation settlement from the OCTA in the amount of $2.5 million for lost profit and property. The Company recorded a pre-tax gain for the $2.5 million in the second quarter of fiscal 2020 related to the settlement, of which $0.2 million represented lost property and equipment, which was included as other income in the consolidated statement of operations. Attorneys’ fees related to this settlement totaled $0.1 million in each of fiscal 2020 and 2019 and were included in selling and administrative expense in the consolidated statement of operations.
Recovery of Insurance Proceeds
In July 2019, one of the Company’s stores was damaged as a result of a fire and, in the fourth quarter of fiscal 2019, the Company disposed of assets of approximately $0.8 million related to lost inventory and property and equipment. In the fourth quarter of fiscal 2020, the Company reached an agreement with its insurance carrier and, after application of a previous advance of $0.5 million and deductible of $0.2 million, the Company received a cash insurance recovery and recorded a gain of $2.8 million in total, of which $1.7 million related to the reimbursement of property and equipment, $0.8 million related to the reimbursement of lost profit margin, and $0.3 million related to a reimbursement for business interruption. The reimbursement of lost property and equipment is included in the accompanying consolidated statements of operations as a reduction to selling and administrative expense, and the reimbursement of lost profit margin and business interruption is included in the accompanying consolidated statements of operations as a reduction to cost of goods sold for fiscal 2020.
In November 2018, one of the Company’s stores was destroyed as a result of a fire and, in the fourth quarter of fiscal 2018, the Company disposed of assets of $0.6 million in total, of which $0.5 million related to lost inventory and $0.1 million related to lost property and equipment. In fiscal 2019, the Company received a cash insurance recovery of $0.9 million in total, net of the insurance deductible, of which $0.7 million related to the reimbursement of lost profit margin, inventory and expense and $0.2 million related to the reimbursement of lost property and equipment. Accordingly, the Company recognized gains of $0.2 million related to the recovery of lost profit margin and expense and $0.1 million related to the recovery of property and equipment. The reimbursement of lost profit margin, inventory and expense is included in the accompanying consolidated statements of operations as a reduction of cost of goods sold for fiscal 2019, and the reimbursement of lost property and equipment is included in the accompanying consolidated statements of operations as a reduction of selling and administrative expense for fiscal 2019.
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.
(14)
|
Share-Based Compensation Plans
|
2019 Equity Incentive Plan
In April 2019, the Company adopted the 2019 Equity Incentive Plan (“2019 Plan”), which replaced the Company’s Amended and Restated 2007 Equity and Performance Incentive Plan (the “Prior Plan”). Awards under the 2019 Plan may consist of share option awards (both incentive share option awards and non-qualified share option awards), stock appreciation rights, nonvested share awards, other stock unit awards or dividend equivalents. In the past, share option awards issued by the Company have typically been non-qualified share option awards, while nonvested share awards and nonvested share unit awards issued by the Company have typically been based on the attainment of service-only conditions. Upon the adoption of the 2019 Plan, the Company stopped issuing awards under the Prior Plan, although the Company will continue to honor any outstanding awards under the Prior Plan.
The 2019 Plan (i) permits the Company to issue a maximum of 3,848,803 shares of the Company’s common stock (representing an increase of 3,300,000 over the 548,803 shares of the Company’s common stock available for issuance under the Prior Plan as of April 11, 2019) plus the number of any additional shares that may thereafter become available as a result of the forfeiture, expiration or other cancellation of awards under any prior plans; and (ii) expires on April 11, 2029.
F-27
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Any share option awards or stock appreciation rights shall be counted against this limit as one share for every one share granted. Any shares that are subject to awards other than share option awards or stock appreciation rights (including shares delivered on the settlement of dividend equivalents) shall be counted against this limit as 2.5 shares for every one share granted. The aggregate number of shares available under the 2019 Plan and the number of outstanding share option awards will be increased or decreased to reflect any changes in the outstanding common stock of the Company by reason of any recapitalization, spin-off, reorganization, reclassification, stock dividend, stock split, reverse stock split, or similar transaction.
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. As of January 3, 2021, 2,462,871 shares remained available for future grant and 742,800 share option awards, 591,325 nonvested share awards and 41,160 nonvested share unit awards remained outstanding.
The Company accounts for its share-based compensation in accordance with ASC 718 and recognizes compensation expense on a straight-line basis over the requisite service period, net of estimated forfeitures, using the fair-value method for share option awards, nonvested share awards and nonvested share unit awards granted with service-only conditions. The estimated forfeiture rate considers historical employee turnover rates stratified into employee pools in comparison with an overall employee turnover rate, as well as expectations about the future. The Company periodically revises the estimated forfeiture rate in subsequent periods if actual forfeitures differ from those estimates. Compensation expense recorded under this method for fiscal 2020 and 2019 was $1.7 million and $1.9 million, respectively, which reduced operating income and income before income taxes by the same amount. Compensation expense recognized in cost of sales was $0.1 million in fiscal 2020 and 2019 and compensation expense recognized in selling and administrative expense was $1.6 million and $1.8 million in fiscal 2020 and 2019, respectively. The recognized tax benefit related to compensation expense for fiscal 2020 and 2019 was $0.4 million and $0.5 million, respectively. Net income for fiscal 2020 and 2019 reflects the net-of-tax charge of $1.3 million and $1.4 million, respectively, or $0.06 and $0.07 per basic and diluted share, respectively.
Share Option Awards
Share option awards granted by the Company generally vest and become exercisable in four equal installments of 25% per year with a maximum life of ten years. The exercise price of share option awards is equal to the quoted market price of the Company’s common stock on the date of grant. The Company granted 257,000 share option awards with a weighted-average grant-date fair value of $1.25 per share option award in fiscal 2020, and granted 263,800 share option awards with a weighted-average grant-date fair value of $1.30 per share option award in fiscal 2019.
The following table details the Company’s share option awards activity for the current fiscal year:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(In Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 29, 2019
|
|
|
523,150
|
|
|
$
|
5.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
257,000
|
|
|
|
2.23
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(31,600
|
)
|
|
|
5.32
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(5,750
|
)
|
|
|
11.52
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2021
|
|
|
742,800
|
|
|
$
|
4.62
|
|
|
|
7.95
|
|
|
$
|
4,380,526
|
|
Exercisable at January 3, 2021
|
|
|
200,770
|
|
|
$
|
7.38
|
|
|
|
6.64
|
|
|
$
|
797,370
|
|
Vested and Expected to Vest at January 3, 2021
|
|
|
732,580
|
|
|
$
|
4.65
|
|
|
|
7.94
|
|
|
$
|
4,305,763
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based upon the Company’s closing stock price of $10.21 per share as of January 3, 2021, which would have been received by the share option award holders had all share option award holders exercised their share option awards as of that date.
The total intrinsic value of share option awards exercised, the total cash received from employees as a result of employee share option award exercises and the actual tax benefit realized for the tax deduction from share option award exercises in fiscal 2020 was approximately $0.1 million, $0.2 million and $25,000, respectively.
F-28
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
No share option awards were exercised in fiscal 2019.
The fair value of each share option award on the date of grant was estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Risk-free interest rate
|
|
|
0.9
|
%
|
|
|
2.5
|
%
|
Expected term
|
|
5.7 years
|
|
|
5.7 years
|
|
Expected volatility
|
|
|
63.0
|
%
|
|
|
53.0
|
%
|
Expected dividend yield
|
|
|
—
|
|
|
|
5.2
|
%
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option award; the expected term represents the weighted-average period of time that option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based upon the Company’s dividend rate at the time fair value is measured and future expectations.
As of January 3, 2021, there was $0.5 million of total unrecognized compensation expense related to nonvested share option awards granted. That expense is expected to be recognized over a weighted-average period of 2.4 years.
Nonvested Share Awards and Nonvested Share Unit Awards
Nonvested share awards and nonvested share unit awards granted by the Company vest for employees from the date of grant in four equal annual installments of 25% per year. Nonvested share awards and nonvested share unit awards granted by the Company to non-employee directors for their service as directors, as defined by ASC 718, vest 100% on the earlier of (a) the date of the Company’s next annual stockholders meeting following the grant date, or (b) the first anniversary of the grant date.
Nonvested share awards become outstanding when granted and are delivered to the recipient upon their vesting. Nonvested 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. In January 2019, the Company delivered 29,672 vested shares, which included dividend reinvestments, for two Board members whose service terminated in fiscal 2018. Outstanding nonvested share awards and nonvested share unit awards accrue dividends at the same rate as dividends paid to the Company’s shareholders. Accrued dividends on nonvested share awards are paid upon vesting of the underlying shares and forfeited if a recipient’s service to the Company is terminated prior to vesting. Accrued dividends on nonvested share unit awards are reinvested into additional nonvested share unit awards and are settled at the same time as the underlying share unit awards. The total fair value of nonvested share awards which vested during fiscal 2020 and 2019 was $0.4 million and $0.6 million, respectively. The total fair value of nonvested share unit awards which vested during fiscal 2020 and 2019 was $0.2 million and $0.2 million, respectively.
The Company granted 321,600 nonvested share awards with a weighted-average grant-date fair value of $1.69 per share award in fiscal 2020 and granted 308,584 nonvested share awards with a weighted-average grant-date fair value of $3.34 per share award in fiscal 2019.
F-29
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following table details the Company’s nonvested share awards activity for the current fiscal year:
|
|
Shares
|
|
|
Weighted-
Average Grant-
Date Fair
Value
|
|
Balance at December 29, 2019
|
|
|
532,524
|
|
|
$
|
6.33
|
|
Granted
|
|
|
321,600
|
|
|
|
1.69
|
|
Vested
|
|
|
(240,424
|
)
|
|
|
6.57
|
|
Forfeited
|
|
|
(22,375
|
)
|
|
|
4.32
|
|
Balance at January 3, 2021
|
|
|
591,325
|
|
|
$
|
3.79
|
|
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 fiscal 2020, the Company withheld 64,573 common shares with a total value of $0.1 million. This amount is presented as a cash outflow from financing activities in the accompanying consolidated statement of cash flows.
As of January 3, 2021, dividends accrued but not paid related to nonvested share awards were $0.2 million.
The Company granted 40,000 nonvested share unit awards with a weighted-average grant-date fair value of $2.28 per share unit award in fiscal 2020 and granted 72,464 nonvested share unit awards with a weighted-average grant-date fair value of $2.07 per share unit award in fiscal 2019. The weighted-average grant-date fair value of nonvested share awards and nonvested share unit awards is the quoted market price of the Company’s common stock on the date of grant.
The following table details the Company’s nonvested share unit awards activity for the current fiscal year:
|
|
Units
|
|
|
Weighted-
Average Grant-
Date Fair
Value
|
|
Balance at December 29, 2019
|
|
|
75,413
|
|
|
$
|
1.81
|
|
Granted
|
|
|
40,000
|
|
|
|
2.28
|
|
Dividend reinvestments
|
|
|
18,064
|
|
|
|
3.28
|
|
Vested
|
|
|
(72,464
|
)
|
|
|
2.07
|
|
Dividend reinvestments vested
|
|
|
(19,853
|
)
|
|
|
2.95
|
|
Balance at January 3, 2021
|
|
|
41,160
|
|
|
$
|
1.91
|
|
As of January 3, 2021, there were 211,635 cumulative nonvested share unit awards remaining that previously vested and are no longer outstanding, of which 47,929 of these awards represented cumulative dividend reinvestments. These cumulative nonvested share unit awards are deliverable to the holders upon termination of their service.
As of January 3, 2021, there was $1.2 million and $38,000 of total unrecognized compensation expense related to nonvested share awards and nonvested share unit awards, respectively. That expense is expected to be recognized over a weighted-average period of 2.1 years and 0.4 years for nonvested share awards and nonvested share unit awards, respectively.
F-30
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In the first quarter of fiscal 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.15 per share of outstanding common stock, which will be paid on March 26, 2021 to stockholders of record as of March 12, 2020.
In January 2021, the wife of Mr. Miller, co-founder of the Company and the father of Steven G. Miller, Chairman of the Board, President, Chief Executive Officer and a director of the Company, passed away and, accordingly, the Company will eliminate an employment agreement-related liability of $1.0 million and reduce selling and administrative expense by the same amount in the first quarter of fiscal 2021, as described more fully in Note 12 of these consolidated financial statements.
On February 24, 2021, the Company entered into a Loan Agreement, as described more fully in Note 8 of these consolidated financial statements.
F-31